How a leveraged buyout works

A leveraged buyout is a purchase made mostly with borrowed money. A private equity firm puts in a small slice of equity, perhaps thirty percent, and borrows the rest. The debt does not sit with the firm. It sits on the company being bought. Every year, the company's cash flow pays down that debt. If the business is sold five years later for the same price, the firm still profits, because the debt is smaller and its equity is larger. This is the quiet engine of private equity. It works when cash flows are steady. It breaks when they are not.