Typically, what percentage of an LBO is composed of debt?

In a typical leveraged buyout (LBO), debt financing plays a crucial role in the capital structure of the acquisition. The common percentage of debt used in an LBO tends to fall within the range of 60 to 70 percent of the total capital structure. This range is generally accepted because it strikes a balance between leveraging the investment for potentially higher returns while maintaining a manageable level of risk.

Using this level of leverage allows private equity firms to enhance their returns on equity by using borrowed funds to finance a significant portion of the purchase price, thereby amplifying the effects of operational improvements and cash flow generation.

Higher leverage ratios, such as 70 to 80 percent or even 80 to 90 percent, significantly increase the risk of the investment due to the increased debt burden, making it harder for the company to service its debt during economic downturns or periods of poor performance. Therefore, while it is possible for some LBOs to approach these higher levels of debt, the preferred and more typical range remains between 60 to 70 percent.