LBO stands for Leveraged Buyout and refers to the takeover of a company that utilizes mainly debt to finance the buyout. Leveraged Buyouts are usually undertaken by private equity firms and rose to prominence in the 1980s.

The company performing the LBO or takeover only has to provide a small amount of the financing (usually around 90% of the cost is financed through debt) yet is able to make a large purchase, hence the name ‘Leveraged’.

The expectation with leveraged buyouts is that the return generated on the acquisition will more than outweigh the interest paid on the debt, hence making it a very good way to experience high returns whilst only risking a small amount of capital.

The most common way for the debt to be raised is for the target company’s assets to be provided as collateral for the debt. The PE firm will then either sell off parts of the target company or use its future cash flows to pay off the debt and then exit at a profit.

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