Domestic hurdles curtail leveraged buy-outs

Private equity firms make most of their investments in leveraged buy-outs (LBO) that involve significant use of debt to finance the acquisition of a company.

LBOs are important instruments of merger and acquisition financing as they allow acquirers to make large business acquisitions without parking significant capital for long periods of time.
Typically, in an LBO, the assets of the target are used as collateral for the debt.

The buy-out is normally followed by efforts to improve the operating profits of the target and to cut costs to generate extra cash to service the debt.

It is common for the acquirer to set up a special purpose vehicle (SPV) with the minimum statutorily prescribed paid-up capital to execute an LBO.

Priti Suri is the proprietor of PSA. Nikita Ved is an associate.