A leveraged buyout is when an investor or typically a PE fund acquires a company by using significant amount debt. Anywhere between 50 to 80% of the purchase price of the company is funded with debt, allowing Private Equity or Buyout funds to invest very little equity of its own. Given that cost of debt is typically lower and allows for a tax shield, PE companies make handsome returns when companies with the ability to generate high cash flows can service the debt over the 5 to 8 year holding period.
Returns are also generated from a higher tag price of the company at the time of sale which the PE fund can extract if it manages to sell at a higher exit multiple versus that of entry or increase the profitability of the investee company.
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