Today in this blog we will discuss LBO and why and how it is used.
So, to understand what an LBO is let’s take an example and explain, let’s say that a Private Equity Firm (A firm that invests in Private Companies) Blackstone Inc. wants to buy out a Company in India which is Haldiram, they don’t have and also don’t want to buy out the company in full dry powder (Cash), so in that case what Blackstone can do is take on leverage (debt) to fund the acquisition of the company.
so typically, when a Private Equity (PE) takes on leverage to buy out a company, in that case, they have advantages and disadvantages as well
the advantage of an LBO is that the investor gets to invest less capital to buy out a company e.g. an investor invests 10 Cr and takes out a loan of 90 Cr to buy out a company so when the company is valued at 200 Cr and the company is sold to another investor, in that case, the investor would earn 5* of what he invested ( 100 Cr Gain and invested 20 Cr ) otherwise if he would have used dry powder than he would have only earned 2* of his invested amount
now the disadvantage of an LBO is that if the same investment is valued at 70 Cr then, in that case, he would have lost not just his invested capital but on top of that 10 Cr extra.
so, an LBO can help multiply as well as destroy your capital.
let’s have a look at some LBO
Hilton was acquired by the Blackstone Group in a $26 billion leveraged buyout in 2007, at the height of the real estate boom. It seemed that the agreement could not have come at a worse moment when the economy collapsed shortly after it was made, especially after several of its partners, Bear Stearns and Lehman Brothers, failed.
After the firm went public in 2013, the situation took a sharp turn for the better, turning the Hilton deal into the most lucrative private equity deal in history. After surviving the storm and earning $12 billion on what many experts consider to be the greatest leveraged buyout ever, the investors who braved the storm became legendary.
Great info