LBO

Leverage, returns drivers, and why private equity loves debt.

1
The LBO and the paper LBO
A leveraged buyout buys a company mostly with borrowed money, then uses the company's own cash flow to pay it down. Sources and uses, IRR and MOIC, and how to run a paper LBO in your head.
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2
What makes a good LBO candidate
The best LBO targets are boring on purpose. Stable, predictable cash flow that services debt, low capex, a defensible market position, hard assets for collateral, and a clear way out. Why cash-flow stability beats a growth story.
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3
Sources and uses
The Sources and Uses table is where every LBO starts. Uses is everything you have to pay for; Sources is where the money comes from. The sponsor's equity check is the plug that makes them tie.
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4
Debt tranches and seniority
How the capital stack is layered in an LBO, why cost rises as you go down, and who gets paid first when a deal goes bad.
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5
IRR and MOIC
The two numbers a private equity sponsor cares about. MOIC tells you how many times you multiplied your money; IRR tells you how fast. Here's how they connect and how to reason about them in your head.
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6
What drives LBO returns
An LBO makes money three ways: paying down debt, growing EBITDA, and selling at a higher multiple than you paid. Here is how leverage amplifies the equity return, and how to walk a clean entry-to-exit bridge to a MOIC.
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7
Credit ratings and leverage ratios
How agencies grade a borrower from AAA down to default, where investment grade ends and junk begins, and how leverage and coverage ratios drive both the rating and the cost of debt.
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8
Capital structure
Capital structure is the mix of debt and equity a company uses to fund itself. Debt is cheaper but comes with fixed payments and bankruptcy risk, equity is expensive but forgiving, and the balance drives both WACC and LBO returns.
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9
Restructuring basics
What happens when a company cannot pay its debts. Out-of-court deals versus Chapter 11, the absolute priority waterfall, recovery rates, and why the fulcrum security ends up owning the reorganized business.
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10
What drives LBO returns (Advanced)
Returns attribution: splitting an LBO's value creation into EBITDA growth, multiple expansion, and debt paydown, and knowing which one a sponsor can actually control. Plus cash sweeps, dividend recaps, and why IRR and MOIC disagree.
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