Investment banking (i) - LBO

LBO (Leveraged Buyout) may sound like a fancy term in the finance circle. This series attempts to breakdown LBO, showing what an LBO is, how it works, and why it is so attractive.

Chapter I: what is an LBO

In simple words, LBO refers to the action of a sponsor (usually a private equity fund) buying a target company, using a large amount of debt financing.

Here let me set the background for a hypothetical LBO - we will use this background in future chapters to illustrate how an LBO works and how does it add value to the key players in an LBO.

- Sponsor ABC ("Sponsor"): Also called the "Buyer" / "Acquirer" - typically a private equity fund
- Target XYZ ("Target"): The company which is being bought, ie. the company that is targeted by the Sponsor
- Lender 123 ("Bank"): Typically a bank, lending to the Sponsor, such that the Sponsor can fund the buying of the Target with debt.

Please watch out for future chapters for breaking down an LBO. Please also feel free to post any questions you may have.