Leveraged buyouts (“LBOs”) rely heavily on debt financing. Because of this, at the heart of any LBO lies an inherent tension between the sponsor and the lenders. The transaction itself is predicated on the sponsor’s financial projections for the target company over the holding period. If these assumptions prove overly optimistic or inaccurate, the result can leave the target company overleveraged and unable to meet its debt obligations (including the leverage the sponsor assumed to conduct the acquisition). Sponsors are motivated to maximize returns by deploying as much leverage as a company can sustain in order to maximize returns. Lenders, by contrast, look to temper this risk. Unlike sponsors, lenders generally do not benefit from the increased equity value and/or increased multiples once the investment is exited. Instead, their primary concerns involve ensuring the repayment of the debt. Balancing these competing interests is vital to the structuring of a successful LBO.
