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Leveraged Buyouts and Private Equity - Essay Example

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Leveraged Buyouts and Private Equity

According to the research findings leveraged buyout first came into the picture as an important phenomenon in 1980s. It was predicted that these types of organizations would form the major portion of organization which will eventually become the dominant one. These types of private equity firms involved themselves in various measures like providing incentives based on managerial abilities, and introduced the concept of active governance. They relied upon the possibility of junk bond financing. A few years later the junk bond market crashed resulting in bankruptcy of several leveraged buyouts and the leveraged buyouts of public to private transactions vanished in the starting phases of 1990s. But the market of leveraged buyout was also suffering a gloomy phase as the private equity firms continued their operation by acquiring private companies. The US experienced the boom in market of leveraged buyout in the mid 2000s. The evidences supported by various researches on some selected companies reveals that private equity investors took the advantages of time factor between the debt and equity markets. The importance of leveraged buyout lies in the usage of financial leverage in order to strengthen the acquisition of the company that has been targeted. The generated cash flow from the bought out business is used to cover he debt incurred in the acquisition. The debt holders are usually expected to earn affixed return while the equity holders seem to grasp all the benefits in a successful buyout. The factors that influence a good leverage buyout includes strong consumer base, small amount of debt on balance sheet, the management team consisting of dependable hands and continuous cash flow (Tuck School of Business at Dartmouth , 2003, p.p. 7-8). Private equity firms Private equity firms are characterized by firms where general partners take the initiative to manage funds while the other partners take the responsibility to provide capital. The limited partners comprise of pension funds, wealthy individuals, and companies operating in the insurance sector. It is important for a partner to contribute to at least 1 percent of the wealth of the firm. The private equity firms has the opportunity to invest the committed capital for at least five years but the period can be extended to ten to thirteen years to return the capital. Again the fund has the life of ten fixed years but can have the extension to thirteen. The limited has little liability in the working of the capital as long as the initial agreements are met. The agreements include restrictions on the amount of capital that can be invested in a company, the particular form of securities in which to invest, and on the level of debt. There are three ways to compensate a general partner. With an annual management fee which is usually a portion of the committed capital and then as a portion of capital employed when the investments are realized. The general partners also earn a share of the profits and they can also charge fees for deal and monitoring to the companies where they put their money in. Portfolio ...Show more


This paper presents summary and current events of leveraged buyouts and private equity. Leverage buyout is a strategy through which a company acquires any other company without investing much equity of them. Instead they prefer to finance the transaction through borrowing…
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Leveraged Buyouts and Private Equity essay example
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