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What makes a company a good LBO candidate for a Buyout PE fund?

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What makes a company a good LBO candidate for a Buyout PE fund?

The priority of a buyout fund which borrows significant amount of debt is to service the debt, i.e. both the interest and the principal promised to be paid back annually. A good LBO candidate has the following characteristics:

a. Strong and sustainable cash flows

b. Significant amount of fixed tangible assets to offer as security versus the debt borrowed.

c. Market leading position (giving it stability)

d. Preferably a strong management at the helm. Even though this is not a deal breaker as a new management can always be parachuted but adds risk to the business model.

e. Some non-core assets which can be sold quickly to reduce leverage.

f. As with all investment - a low valuation at entry.

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