A leveraged buyout is when a PE firm acquires a company owned by public shareholders by using the target company's own assets as collateral to secure debt, which it uses to pay a premium for all of the company's shares. In other words, the public company that is acquired is taken private and is then responsible for paying back the debt that was used to purchase it. This technique is considered "leveraged" because the PE firms are using borrowed capital, which increases their scale and thus their potential return on investment. Following the acquisition, the PE firm then restructures the company over the next several years, pays itself dividends and fees in the mean time, then "exits" the investment by selling the streamlined property or taking it public. While the company is private and controlled by the PE firm, it is not bound by SEC regulations requiring disclosures and prohibiting highly speculative strategies.

DEFINE: Clarifies the mechanics of a leveraged buyout, especially the counterintuitive detail that the acquired company becomes responsible for the debt used to purchase it.

Andrew deWaard, Derivative Media, loc. 132