WHAT IS LEVERAGED BUYOUT ?
The leveraged buyout, better known by its acronym LBO, is a financial operation that involves acquiring a company by financing the acquisition primarily with debt. Translated into French as 'rachat avec effet de levier' or 'acquisition à effet de levier', the LBO is one of the flagship strategies in private equity, used by institutional investment funds as well as individual buyers. This guide provides everything you need to know about leveraged buyouts: definition, how they work, types of structures, returns, risks, and concrete ways for individuals to invest in them.
What is a leveraged buyout?
Leveraged Buyout: Definition and Meaning
Leveraged buyout refers to a business purchase transaction in which the purchase price is financed largely by bank debt or bond debt, rather than by the purchaser's equity. In French, we talk about buy-back with leverage. Typically, debt represents 60% to 80% of total financing, with equity provided by the fund or buyers covering the balance. The repayment of this debt is then ensured by the cash flows generated by the purchased company itself, also called the target company.
Why do we talk about leverage?
The term “leveraged” refers to the financial leverage effect, a mechanism that makes it possible to amplify the return on invested equity. The larger the debt, the higher the potential return on equity, provided the company is able to repay the debt on time. This principle is at the heart of the LBO: by mobilizing little capital and a lot of debt, the purchaser can expect a return much higher than that of a cash purchase, with the counterpart of increased financial risk.
How does a leveraged buyout work?
Creating a buyout holding
To carry out an LBO, acquirers first create a holding company, also known as NewCo. Its sole mission is to acquire the shares of the target company. It will incur the debt necessary for the acquisition and subsequently hold the shares of the target company. This structure allows the debt to be housed at the holding company level and to benefit from the tax advantages associated with consolidation.
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A concrete impact on the real economy
By investing in a private equity fund, you participate directly in the financing of innovation, job creation and business development. Your capital is used to support the growth of promising companies and to support entrepreneurs in their development projects.
Repayment of debt through the flow of the target company
The fundamental principle of the LBO is based on the ability of the target company to generate enough cash to repay the debt incurred by the holding company. The dividends paid by the subsidiary go back to the holding company, which uses them to gradually repay its debt. This mechanism works as long as the target's cash flows remain stable and predictable, which is why LBO funds prefer mature, profitable and low-cyclical businesses.
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The three leverage effects of an LBO
Financial leverage
This is the main leverage of an LBO. By financing the acquisition primarily with debt, the acquirer reduces the initial equity outlay while capturing the full future capital gain.
If the company is resold at a profit after a few years of ownership, the return on invested equity can reach several multiples, far exceeding what a simple stock market investment would have yielded.
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Tax leverage
The second leverage is fiscal. The interest on the debt incurred by the holding company is deductible from its taxable income. Under a tax consolidation regime, the subsidiary's profits and the holding company's interest expenses offset each other, which significantly reduces the tax paid by the group.
This tax leverage is one of the main attractions of LBOs, even though it is subject to regulatory caps.
Legal leverage
The third leverage is legal. Through the holding company structure, the acquirer can gain control of a target company much larger than their direct capital contribution would otherwise allow.
This control mechanism enables a fund to manage a portfolio of companies whose total value significantly exceeds the fund's own size.
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The different types of LBOs
There are several variants of leveraged buyouts depending on the profile of the buyers and their role in the transaction.
LMBO (Leveraged Management Buy-Out)
In an LMBO, it is the managers already in place in the company who buy the company, with the support of a private equity fund. This configuration has the advantage of strong managerial continuity, as the buyers know the company perfectly.
MBI (Management Buy-In)
The MBI differs from the LMBO in the profile of the buyers: they are external managers, often experienced in the sector, who buy the company to take over the company. This type of operation is common when the team in place does not want to continue or does not have the financial means to take over the company.
BIMBO (Buy-In Management Buy-Out)
BIMBO combines the two previous approaches: some of the managers are already in place, supplemented by external managers who are joining the operation. This formula makes it possible to mix the company's internal knowledge with a contribution of new expertise.
OBO (Owner Buy-Out)
OBO is an operation in which the owning manager of the company himself organizes the purchase of his own company via a holding company. It is a mechanism often used to monetize part of one's professional wealth while maintaining operational management.
Which companies are the targets of an LBO?
LBO funds target a very specific company profile, because the mechanism is based on the ability of the target to repay debt. The companies in question are generally mature, profitable for several years, with stable and predictable cash flows. There are family SMEs and ETIs in the transfer phase, subsidiaries of large groups put on sale, or companies undervalued by listed markets. Sectors that are not very cyclical, such as health, B2B services, agri-food or consumer goods, are particularly in demand.
The actors of a leveraged buyout
Private equity funds
Private equity funds are the main architects of LBO transactions. They identify the targets, structure the financial package, provide equity capital and support the company throughout the ownership period, generally 5 to 10 years.
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Banks and lenders
Banks provide senior debt, which is the first tier of financing. In more complex transactions, there are also private debt funds that provide mezzanine or unitranche debt. These lenders are crucial because it is their trust in the target that determines the arrangement.
Managers and buyers
The managers of the target company are often involved in the operation through a personal investment in the capital of the holding company. This participation, even a minority one, aligns their interests with those of the fund and constitutes a powerful motivational mechanism for the duration of the detention.
What return can you expect from an LBO fund?
Historical performance of the segment
The LBO has historically shown attractive returns, generally between 12% and 15% annualized over a long period of time. According to France Invest, the 10-year IRR of French transmission capital was around 14% at the end of 2024. Bain & Company reports comparable performances on the North American market, with a significant premium compared to listed markets.
Dispersion of performance between funds
As with all private equity, the dispersion of performances between the best and the worst LBO funds is important. Funds in the top quartile show returns in excess of 20% annualized, while those in the bottom quartile struggle to exceed 5%. Only the funds in the first quartile, and possibly the top of the second, outperform listed markets significantly. The selection of the manager is therefore decisive in order to obtain attractive LBO performances.
Main risks of LBO investing
Good to know
The main risk of an LBO comes from its dependence on debt. If the target's cash flow falls, due to a market downturn or a sectoral crisis, the company may find it difficult to repay its due dates. This is called a distressed LBO, which can lead to restructuring or a total loss of the investment.
Other risks should be considered: illiquidity, with capital locked in place for 5 to 10 years, sensitivity to interest rates, which can increase the cost of debt, and finally, the dispersion of returns, which makes fund selection crucial. A poor choice of manager can lead to lower returns than listed markets once fees are deducted.
How to invest in an LBO fund as an individual?
Accessible investment vehicles
Several vehicles allow individuals to access the LBO in France, each with specific characteristics.
Compatible tax envelopes
The ordinary securities account remains the most flexible envelope for housing an LBO investment, with a single flat tax of 30%. Life insurance offers increasing access to unit-linked LBO funds, with a simplified tax framework after 8 years. The PEA-PME makes it possible to house certain eligible funds, but the FPCI used by specialized platforms are not eligible. On the IR-SME reform side, the framework has been profoundly modified by the finance laws for 2025 and 2026: the 25% tax reduction remains only for FCPIs invested in JEI shares and for FIPs in Corsica and Overseas (at 30%). Classic FCPI and FIP no longer entitle you to a reduction.
What is the minimum amount to start?
Historically, institutional LBO funds require entry tickets of 100,000 to several million euros, effectively reserving this asset class for large fortunes and institutional investors. Today, the democratization of private equity has considerably lowered these thresholds. Specialized platforms are now making LBO accessible to informed individuals within a regulated framework. At Fundora, it is possible to invest in carefully selected LBO strategies, via a shared institutional ticket that democratizes access to private equity for individuals.
Good to know
Investing in LBO with Fundora
Democratized LBO access for individual investors
Fundora and Kyoseil Asset Management, an AMF-regulated asset management company, make LBO strategies accessible to individual investors through discretionary management. Specifically, Fundora structures access to funds via FPCIs and dedicated SPV (Special Purpose Vehicle) structures. This mechanism pools subscriptions from several individual investors within a single structure, which then invests directly in the target funds. This pooling significantly lowers the entry ticket, whereas institutional funds typically require minimums of several hundred thousand euros.
Rigorous selection of LBO strategies
Fundora identifies and offers investment opportunities in institutional-grade LBO strategies, with effective management provided by Kyoseil Asset Management under the mandate. This selection is crucial: the dispersion of LBO performance makes the choice of fund critical. Using a platform backed by an AMF-regulated asset management company allows investors to focus on managers who have proven their ability to generate sustainable value.
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An example of an LBO strategy accessible on Fundora
Among the LBO strategies offered on Fundora is the Belmont LBO strategy, which targets European family SMEs undergoing a transfer of ownership. It invests in non-cyclical sectors such as industry, luxury craftsmanship, healthcare, and precision manufacturing, acquiring niche market leaders at reasonable valuations. The stated multiple objective is 2.4x the invested capital over a 10-year period. A unique feature of this strategy is its aim to generate dividends during the fund's life in addition to capital gains upon resale, thanks to companies with strong cash flow generation. Access is open to individual investors via Fundora's FPCI/SPV structure, which pools subscriptions to democratize this asset class.
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THE WAY TO ACCESS PRIVATE FUNDS
