Leveraged Buyout (LBO)
Definition
A leveraged buyout is the acquisition of a company using a large amount of borrowed money, with the target company’s own cash flows used to repay the debt. The buyer puts up a small slice of equity, borrows the rest, and earns its return by paying the debt down and selling the business later.
In practice
The LBO is the core machine of private equity. Because debt magnifies both gains and losses, the model rewards stable, cash-generative businesses and punishes cyclical ones. KKR’s buyouts of Beatrice and RJR Nabisco made the structure famous in the 1980s, and the same mechanics power thousands of deals a year today.