Private Equity Leverage

Leveraged Buyout.  The term itself has a mystique to many people, but at its core it refers to buying a company (a “buyout”) using leverage (i.e., debt), usually a lot of it.  While many types of business owners can utilize borrowings to fund an acquisition, the term is synonymous with private equity firms buying companies using significant amounts of borrowed capital.  Leveraged buyouts date back to the 1960s, when the predecessors of the original private equity firms were bootstrapping deals together.  While much has changed in the intervening decades—including the development and maturation of the private equity industry—some things have not, including leverage's importance in any buyout.  Without one or more lenders or other credit providers, there cannot be a leveraged buyout; therefore, lenders and credit investors are important stakeholders in closing every private equity buyout.  In addition, the leverage places certain constraints on the borrower, so the lender or credit provider is a key stakeholder in the ultimate success of the private equity firm’s investment.

By its nature, the financing of leveraged transactions is significantly different from that of large-cap publicly traded or Fortune 500 companies, which often have access to low-cost commercial paper, the investment-grade bond market, global banks, and numerous other parts of the capital markets.  While those companies may borrow tens of billions of dollars from banks and other sources, those companies’ debt is typically considered relatively low risk (perhaps having a low debt-to-cap ratio or denoted as “investment grade”).  Today, leverage in buyouts is often 40%, 50%, or even 60%+ of the company’s total capitalization.  Underwriting for these deals in significantly different than traditional underwriting.

This course will cover the topic of leverage used in private equity buyouts1:  why leverage is important, various commonly deployed forms of leverage, and trends in the overall marketplace (including the rapid growth of private credit, especially in the middle market).  This course will provide:

• an understanding of the various forms of leverage commonly deployed by private equity firms (and other business owners) in transactions, including borrowings from banks and private credit firms and through the issuance of high-yield bonds
• the experience of acti