The Resurgence of LBO Buyouts

As the M&A market continues to grow, so does the interest in leverage buyouts. A leveraged buyout is when a company completes an acquisition by utilizing loans from outside sources or through a note held by the seller. Leverage buyouts build value by improving profitability and by accelerating innovation and new market expansion.

Middle market businesses are starting to add merger and acquisitions to their toolkit of growth strategies. This is due to the fact that businesses increase revenue growth and lower costs through making acquisitions. This has led to a resurgence of buyouts within the middle market segment. The acquiring companies represent a wide spectrum of LBO buyers. Some buyers are comparably sized, middle market companies. There are strategic buyers that are looking for add on acquisitions. These tend to be larger companies with strong management teams and well established systems. There are financial LBO buyers who are private equity firms. Most firms have an industry focus and a deal size preference. Some of the private equity buyers have committed funds behind them and some are fund-less sponsors who raise financing on a deal specific basis. Finally, there are large public companies who are also looking for complementary middle market acquisitions. These companies tend to have higher stock prices and need to continue to show growth to support their loft stock valuation. All buyers in the middle market have created a resurgence of LBO buyouts as all but very well capitalized companies use debt to finance the purchase.

Leverage buyouts were gaining traction on high-yields before the financial crisis, however, that market disappeared in the immediate aftermath. Over the past five years, the LBO market has developed again, as investors hungry for income have flooded the loan market. Financing for leverage buyouts has become increasingly attractive with historically low interest rates, increasing overall returns and making room for more leverage buyouts to occur.

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