In: Finance
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