LBO and Paper LBO
PE · LBO
Sources and uses, debt schedule, cash sweep, exit multiple, and returns math.
How an LBO works
What an LBO is
In a leveraged buyout a financial sponsor (a private equity firm) buys a company using a large amount of debt — often 50–70% of the purchase price — and a smaller equity cheque. The company's own cash flow services and repays the debt, and the sponsor sells after 3–7 years. The target return is typically a 20–25% IRR and a 2.0–3.0x MOIC.
How to answer in an interview
Concord's word-for-word interview answer for “How an LBO works”, plus the full lesson and graded practice.
See the answer with a free accountDrawing diagram…
Uses are what the deal must pay for: the target's equity at the offer price times diluted shares, refinancing of existing debt, transaction and financing fees, and any cash left on the balance sheet. Sources fund those uses: senior secured debt, junior debt such as high-yield notes, management rollover and sponsor equity. Sponsor equity is the plug that makes total sources equal total uses.
Common pitfall
Returns come from three levers: deleveraging, EBITDA growth, and multiple change. In a paper LBO, say which lever is doing the work before you do the math.
Learn these first
Study module
- LBO and Paper LBO70 min