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May 31, 2024
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The debt used in an LBO will be placed on the target's balance sheet, which is why there are discussions over the ethical responsibility of a sponsor when leveraging significantly in an LBO. The recent Toys 'r' Us issue revolved around this, where the impact of interest on the debt taken on during its LBO affected their cash-generating ability and in extension, their solvency.
I under stand that, but since a PE firm is a majority owner, do they consolidate the balance sheets of all their holding companies onto their own? It seems unlikely because i.e. KKR likely has way more debt across their portfolio companies than the 26B listed on their own balance sheet. But was wondering if anyone on the forum has covered asset managers in a research/IB capacity that can speak to this.
A PE firm typically uses a special purpose vehicle (SPV) to place its invested funds into each investment. In this manner, it is the consolidation of the PortCo's financials into the SPV itself and not the PE firm's operating company.
If a PE company buys a firm in an LBO and is the sponsor equity piece, the debt will be raised and syndicated out to debt funds that will hold it. Since the PE company doesn't hold any of the debt it will not appear on their balance sheet.
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