What is the typical mix of debt and equity in a Leveraged Buyout (LBO) transaction?

In a Leveraged Buyout (LBO) transaction, the typical structure involves a significant portion of debt financing, which is used to cover the majority of the purchase price for the target company. Choosing a 70 debt to 30 equity mix reflects a common leverage ratio seen in LBOs, where substantial borrowing is necessary to enhance returns on equity for investors.

This structure allows private equity firms to utilize less of their own capital while taking advantage of excessive debt. The higher the proportion of debt, the more potential for increased returns, assuming the acquired company's cash flow is strong enough to service the debt obligations.

Within real-world applications, ratios can vary based on market conditions, the target company's financial health, and the lending environment, but 70% debt is seen frequently as it maximizes leverage, balancing risk with the potential for high returns.