So I read somewhere that PE funds use their targets' assets and liabilities to lever up heavily and buy them out. I'm not sure how exactly this works and want to get a basic understanding of what they typically do.
I also read that if the target acquired company fails, then the PE fund doesn't have any liability and can't go bankrupt because of it.
Can someone please explain to me how this works?
Can't PE funds just buy companies out with a ton of debt, part them out while paying themselves special dividends funded by more debt, and then screw the companies over and let go of their employees while making huge ROIs for the general/limited partners?
Thanks,
You should take a quick read through the Wikipedia page on corporate raiders. It was a thing in the 70s and 80s, but happens far, far less now.
There are certainly all kinds of strategies, but as I understand it most private equity firms these days are interested in purchasing a company to improve its operations and thus future sale price by either increasing the purchase multiple or increasing the company's EBITDA (or other proxy) itself at the same multiple.
Re: the leverage situation, yes, you are correct, there is risk inherent to taking on any debt, but again, many firms these days use a judicious amount of leverage and view intelligent modeling as a way to determine the optimum capital structure that will help guard against covenant breach in the downside scenario (in addition to its other uses).
Here's a good watch on LBOs from Mergers & Inquisitions:
By avoiding companies like WeWork
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