In Leverage Buyout (LBO), the company making the acquisition, in this case the private equity firm, profits by leveraging their capital to generate outside returns.
The key factor driving the profitability of private equity lies in their ability to utilize external funds (other people’s capital), leading to significantly higher returns on their own invested capital compared to if they were using all the capital themselves.
Check out the link to this podcast episode, where you can delve deeper into the impact of the leverage in the IRR of an LBO.
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