Private Equity and LBOs: mechanisms, challenges, and prospects
Article by Patrick DAGUET, Academic Director of the Executive Postgraduate Program in Financial Management*
05/26/2025
3 min
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Private equity is a form of financial operation that involves investing in companies that are not listed on the public stock exchange, often to support their development or restructuring. Among the strategies used by private equity funds, leveraged buyouts (LBOs) are one of the most iconic. This financial technique allows a company to be acquired using a significant amount of debt, which is repaid using the cash flow generated by the company itself. The aim of an LBO is to maximize the return on invested capital.
The fundamentals of LBOs: definition and structure
An LBO is a transaction involving the acquisition of a company financed largely by debt. Typically, a holding company is created to acquire the target, combining equity contributions from investors and loans from financial institutions. The debt is then repaid using the cash flow generated by the acquired company. This mechanism creates financial leverage, potentially increasing the return on equity invested.
What are the criteria for the companies targeted?
Companies targeted for an LBO generally have the following characteristics:
• Stable and predictable cash flow: to ensure repayment of the debt.
• Strong competitive position: to maintain or improve profit.
• Tangible assets: which can be used as collateral for lenders.
• Potential for operational improvement: offering opportunities for post-acquisition value creation.
What are the advantages and risks?
This type of financial technique has both advantages and risks. The advantages include:
• Leverage: by using debt, investors can increase the return on their equity.
• Aligning interests: managers may be incentivized to improve the company’s performance, particularly in the case of management buyouts (MBOs).
• Tax optimization: debt interest is generally deductible, reducing corporate income tax.
However, it is also important for stakeholders to consider and examine several risk factors such as:
• Debt overload: excessive debt can jeopardize the company’s solvency, especially in the event of a downturn in business.
• Cash flow pressure: debt repayment can limit investment and innovation capabilities.
• Sensitivity to economic conditions: changes in interest rates or market conditions can affect the viability of the transaction.
LBOs: recent trends and outlook
After a period of slowdown, due to rising interest rates in 2022, the LBO market is showing signs of recovery.
Major transactions, such as Sanofi’s sale of a majority stake in its Doliprane-producing subsidiary for nearly €16 billion, illustrate this upturn in activity. However, transaction values remain below the levels seen between 2011 and 2021.
Large private equity platforms, such as Blackstone and Apollo, continue to dominate the LBO market, benefiting from their ability to raise significant funds and structure complex transactions. Nevertheless, increased competition and stricter regulatory requirements are pushing players to innovate and diversify their investment strategies.
Agility and discernment to take advantage of opportunities…
LBOs remain a powerful private equity tool, enabling acquisitions to be made with limited equity investment while targeting high returns. However, the success of these transactions depends on rigorous analysis of targets, appropriate financial structuring, and proactive risk management.
In a changing economic environment, private equity players must demonstrate agility and discernment to capitalize on opportunities while managing the challenges inherent in LBOs.
*Patrick DAGUET is Academic Director of the Executive postgraduate program in Financial Management (which is taught in French). Leveraged buy-out (LBO) techniques are covered in the program’s specialized module on complex financial operations. Generally speaking, these operations are put into practice through concrete case studies in class.
Photo: Istock – Iryna Drozd
