Why does debt increase IRR?

First, the buyer finances the majority of the purchase with debt (i.e., borrowed cash). Because debt is cheaper than equity. As a result, all else being equal, the more debt you use in a transaction, the higher your internal rate of return (“IRR”).

What happens to debt in LBO?

For the most part, a company’s existing capital structure does NOT matter in leveraged buyout scenarios. That’s because in an LBO, the PE firm completely replaces the company’s existing Debt and Equity with new Debt and Equity. The PE firm will also have to contribute the same amount of equity to the deal (5x EBITDA).

What are the largest leveraged buyouts in history?

A familiar face to many of the largest leveraged buyouts in history, the Blackstone Group was part of a consortium of investors that were part of the 2006 buyout of Freescale Semiconductor for $18 billion.

Can a leveraged buyout be used to break up a company?

However, some companies grow so large and inefficient that it becomes more profitable for a buyer to use a leveraged buyout to break it up and sell it as a series of smaller companies. These individual sales are typically more than enough to pay off the loan of purchasing the company as a whole.

What is leveraged finance and how does it work?

Leveraged finance refers to the financing of highly levered, speculative-grade companies. Within the investment bank, the Leveraged Finance (“LevFin”) group works with corporations and private equity firms to raise debt capital by syndicating loans and underwriting bond offerings to be used in LBOs, M&A, debt refinancing and recapitalizations.

What was the most profitable private equity deal ever?

Things turned around drastically when the company went public in 2013, famously transforming the Hilton deal into the most profitable private equity deal ever. The investors who weathered the storm became legendary, making $12 billion on what many analysts believe to be the best-leveraged buyout of all time.