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A leveraged buyout is an acquisition financed with a material amount of debt secured on the target’s cash flows and assets, so equity writes a minority of the cheque and returns are amplified — in both directions.
In an all-equity acquisition, the buyer’s cost of capital is mostly equity. In a leveraged buyout, Bidco borrows against the target (and sometimes the buyer) so that:
EV = new debt + rollover equity + sponsor equity (± other)
Invest Europe places LBOs at the centre of buyout PE. The same structure appears in MBOs and some corporate take-privates.
Returns (IRR, MOIC) then depend on EBITDA growth, exit multiple, and debt paydown. Leverage is not free: interest cover and covenants can transfer the equity to lenders.
Illustration only. Sources-and-uses at close.
| Uses | €m | Sources | €m |
|---|---|---|---|
| Equity value to seller | 70 | Senior debt | 45 |
| Refinance old debt | 8 | Sponsor equity | 28 |
| Fees | 3 | Management rollover | 8 |
| Total | 81 | Total | 81 |
If closing EBITDA is €10m, senior leverage is 4.5x. A 200 bp rate shock and a 10% EBITDA miss can exhaust cover even if the “equity story” is intact. Large sponsor deals in services platforms (insurance brokerage, software) are underwritten on this grid at much larger scale — same arithmetic.
Good LBO candidates: stable, diversified cash flow, modest maintenance CAPEX, defensible margins, professionalisable operations. Bad ones: capex spikes, customer concentration, cyclical troughs financed at peak debt-to-EBITDA.
PE control deals; some family office control deals; public-to-private.
Credit cycles shut the model. Portability of debt, W&I, and locked-box leakage are as important as the IC IRR hockey stick. Accounting EBITDA ≠ covenant EBITDA.
Dazur stores the credit-relevant bridge (cash EBITDA, capex, WC, concentration) so an LBO screen is not run on a marketing multiple. The company does not “have an LBO”; a capital structure does.