Leveraged Buyout

A leveraged buyout can also be referred to as an LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction. It occurs when a financial sponsor acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through borrowed money.

Leveraged buyouts allow financial sponsors to make large acquisitions without committing all the capital required for the acquisition. The use of debt also significantly increases the returns to a LBO's financial sponsor, as cash flows from the target company, rather than the financial sponsors, are used to pay down the debt used to purchase the company.

This, in combination with the fact that financial sponsors pay only a portion of the original purchase price, means that a later sale of the company produces significant returns for the financial sponsor.