A Leveraged Buyout is the acquisition process of a company by another company using a large amount of borrowed capital. The assets of the acquired company are used as a collateral for the capital that is borrowed. This means that if it goes in financial trouble it can sell its assets to pay back the debt.
The purchase can be financed both by loans or by an emission of bonds.
In leveraged buyouts, the amount of borrowed money is extremely high. Even 90% of borrowed capital and 10% of equity only.
Given the fact that this high level of debt makes these investments very risky. The bonds that are issued as a result of these deals are usually non-investment grade, also called junk bonds.
In the 1980s these Leveraged Buyouts deals were viewed as an extremely bad phenomenon because a lot of them brought the targeted companies into bankruptcy and a lot of people lost their jobs as a result of this.
By making a leveraged buyout you can spin off a branch of a business by selling it, bring private a public company or simply to buy a private company.
Private equity firms are the main companies operating in the Leveraged Buyout Business. The one that made the largest deals is KKR, which is ran by billionaires Henry Kravis and George Roberts. Other firms like The Carlyle Group co-founded by David Rubenstein and Blackstone made very large deals as well.
A book and a movie were made about one of the largest takeovers made by KKR, called “Barbarians At The Gate” which talks about the RJR Nabisco deal. That deal didn’t finish as well as KKR hoped for and had to sell lots of the company’s assets and brands. Another notorious deal was when Blackstone bought out the Hilton hotel chain in 2007 for 26 billion dollars, took it public in 2013 and then slowly exited the investment. In that case the private equity fund was able to provide value to the hotel chain and made it more stable.
#leveragedbuyout #privateequity #barbariansatthegate
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