Does LBO really provide value? An empirical analysis of post-LBO performance.

A leveraged buyout is a type of acquisition involving the substantial use of debt as a source of funds to pay the purchase price of a particular target. The debt is usually paid down through the future cash flows of the acquired firm.
The leveraged buyout belongs to the category of private equity investments and it is positioned at the last stage of the cycle of those operations. Therefore it usually involves mature firms operating in stable markets, not growing and young ones. Most part of the transactions involve private firms, but several deals (the so-called “going private” deals) consist in the purchase of the totality of shares of public companies (although sometimes a small public ownership is preserved). The main purpose of an LBO is to allow sophisticated investors (called financial sponsors or private equity funds) to achieve high returns in terms of Internal Rate of Return (IRR) and cash multiples. According to industry standards, the target IRR has to be higher than 20-25%. The investment in the portfolio firm is hold for a period varying between 3 and 5 years, but recently even shorter holding horizons have appeared. The purchase price is financed by a wide category of highly structured debt instruments (Senior Term Loans, 2nd Lien Debt, Mezzanine Debt and High Yield Debt), while the equity investment normally accounts for 20-40% of the total consideration. Also the equity instruments can be differentiated on the basis of their seniority and usual securities are common and preferred shares which can be subscribed by the financial sponsors and the managers of the company.