Ways Debt can boost LBO returns post-transaction close

Hi guys,

I was recently asked a technical question during an experienced IB Analyst interview that had me stumped.

I was asked: What are 3 ways you could use Debt in an LBO to boost returns?

I only came up with 2:

  1. Taking on Debt to fund a Dividend Recap
  2. Assuming interest rates have fallen since transaction close, taking now new Debt to repay existing Debt, essentially refinancing Debt as a lower interest rate
  3. Taking on Debt to fund an add-on or bolt-on acquisition

The interviewer said I got 2 right, but he did not mention which ones, not which 3 answers they were looking for.

Any input/advice from you guys?
Thanks in advance.

 

Out of the three you listed, 1 and 3 are definitely right. Potentially the one you missed is using leverage to initially finance the acquisition to increase returns which is kind of the most important one... unless that was already assumed in the question

 

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