LBO Financing

LBO Financing

Mike Burkart, Samuel Lee, Henrik Petri

Series number :

Serial Number: 

Date posted :

September 11 2020

Last revised :

November 01 2023
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  • Leveraged buyouts • 
  • bootstrap acquisitions • 
  • tender offers • 
  • free-rider problem • 
  • debt overhang • 
  • private equity

We rationalize why leverage in buyouts differs from corporate leverage at large by merging two strands of buyout theory that focus on problems of public ownership: the Berle-Means problem (lack of incentives) and the Grossman- Hart problem (free-riding).

We derive in such a framework the novel result that the combination of bootstrapping, very high leverage, and upfront cashouts is socially optimal and increases buyout premia. This buyout structure mimics a management contract, paying a bidder (e.g. a private equity firm) upfront cash and stock to manage the target, with the cash portion funded by debt imposed on the target.




Real name:
Fellow, Research Member
London School of Economics and Political Science
Real name:
Research Member
Leavey School of Business, Santa Clara University
Real name:
Henrik Petri