Question

In: Finance

How do LBO funds make money? Name 3 ways.

  1. How do LBO funds make money? Name 3 ways.

Solutions

Expert Solution

The basic idea of leverage buyout is buying a company or a part of a company which is highly undervalued. There can be many reasons for undervaluation for example

1 The company is not doing good under current management and making losses which reduced its price but under good management, it can do well

2 The target is a part of a company which has high potential but the owners don't have any interest in this part

3 The target can provide synergy to other business already owned by private equity and thus its value will be higher than the present.

The LBO private equities buy the undervalued business and then operate it to unlock its true value and make it profitable and highly attractive. After this, they make money in the following way.

1 Selling the business to another company in a private placement and earn a huge benefit

2 Make the business public by launching an IPO

3 Continue running the company. Repay the debt taken in purchasing it and take home the residual profit.

It generally depends on the PE firm which option they want to use. It is generally depends on case by case basis


Related Solutions

Name 3 ways of controlling gene expression.
Name 3 ways of controlling gene expression.
Section 3.6: Contrasting Hedge Funds Against Money Market Funds Explain how hedge funds differ from money...
Section 3.6: Contrasting Hedge Funds Against Money Market Funds Explain how hedge funds differ from money market funds.
how do brokerage make their money in investment banking fees and mutual fees
how do brokerage make their money in investment banking fees and mutual fees
What is the Time Value of Money and how do financial managers use it to make...
What is the Time Value of Money and how do financial managers use it to make business decisions?
If an investor needs to place funds in the money market for a term of 3...
If an investor needs to place funds in the money market for a term of 3 months, would you advise him/her to ride the curve? explain using expectation of rates in the coming months
Hedge funds: What they are? What do they do? Does the name actually say much about...
Hedge funds: What they are? What do they do? Does the name actually say much about what they do, why and why not? Why are they not as tightly regulated?
Name or describe 3 ways that the supply and demand graphs for labor is similar to...
Name or describe 3 ways that the supply and demand graphs for labor is similar to the supply and demand graphs for a product. Then name or describe 3 significant ways they are different.
Some hedge funds make money by providing liquidity to the market. Discuss. Support your answer with...
Some hedge funds make money by providing liquidity to the market. Discuss. Support your answer with examples.
how do brokerage firms make money through Trading profits on stocks and Trading profits on bonds
how do brokerage firms make money through Trading profits on stocks and Trading profits on bonds
3. What is McDonald’s’ business model? How does McDonald’s make money? 1. What is the strategic...
3. What is McDonald’s’ business model? How does McDonald’s make money? 1. What is the strategic issue(s) that McDonald’s needs to address? What are McDonald’s’ core competencies?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT