Private Equity Leverage

Leveraged Buyout. The term itself has a mystique to many people, but at its core it refers to buying a company (a “buyout”) using debt (i.e., leverage), usually a lot of it. While many types of business owners can utilize borrowings to fund an acquisition, the term is synonymous with private equity firms buying companies using significant amounts of borrowed capital. Leveraged buyouts date back to the 1960s, when the predecessors of the original private equity firms were bootstrapping deals together. While much has changed in the intervening decades—including the development and maturation of the private equity industry—some things have not, including leverage's importance in any buyout. Without one or more lenders or other credit providers, there cannot be a leveraged buyout; therefore, lenders and credit investors are important stakeholders in closing every private equity buyout. In addition, the leverage places certain constraints on the borrower; this contractual relationship makes the lender or credit provider a key stakeholder in the ultimate success of the private equity firm’s buyout.