LBO question - How to gain on this?

By not paying 100 dollars of your own money to start. Let's say you only put up 20 (your equity). Add some color to the hypothet by saying that you assume the 80 you took on in debt is paid down over those five years and your equity has grown as a result, even if the firm itself has not grown.

Lots of great topics on basic LBO questions, check the search function. The "mortgage" analogy is always a nice way to think about it.

Isn't it obvious? Massive deflation.

Or there's the dividend recap.

You gain if you initially financed the transaction with a small amount of equity and a massive amount of debt, and managed to pay down the debt over time such that the enterprise value at close, while same as the start, was composed of all equity (instead of mostly debt). This is the standard mechanism of debt paydown in a leveraged transaction.

much like the above posters mentioned.

here it is in a bit more numerical detail.

the sponsor invests 20m in equity and 80m is raised through debt for a purchase price of 100m.

over a period of five years, the company is able to generate enough cash flows to pay down the entire amount of debt (80m).

At the end of year 5, the debt balance is zero and the sponsor takes the company public or sells it to another firm for 100m.

The 100m goes straight to the sponsor for a return of 5x, cash on cash anyway.

Pretty decent return.

Or... I invest $100 in the company, owning 100% of the equity. The company makes a net profit of $1,000 billion because I'm an awesome CEO and I pay out 100% in dividends to myself. Sell the company a year later for $100 because I'm a retard. Wham, bam, thank you ma'am.