Leveraged Buyout
A leveraged buyout is a purchase financed mostly with debt on the target’s cash flows — private equity’s standard carry trade on coverage.
Definition
Sponsors put in equity, pile senior and subordinated debt, and underwrite an exit multiple. Returns come from EBITDA growth, multiple expansion, and debt paydown. The equity is an option on those three.
Why it matters
Credit cycles are LBO cycles. Covenant-lite supply, add-backs, and dividend recaps are how the structure meets a boom.
Case
A 2021 LBO at 12× EBITDA with 7× debt. Rates doubled, the exit multiple did not, and the equity option went out of the money while lenders extend-and-pretend.
How to read it
Entry multiple, leverage, add-backs, and the rate path. If the model needs multiple expansion to clear the hurdle, it is a tape trade.