Risk Adjusted Returns in a Leveraged Buyout
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The concept of risk adjusted returns refines an investment's return by measuring how much risk is involved in producing that return. This concept is especially prevalent in leveraged buyouts. In this paper, the corporate structure of a company including senior debt, subordinated debt, and equity is dissected. These levels are analyzed according to payment priority, structure, sources, and risk level, and ultimately valued by its required rate of return. Then, the mechanics of a leveraged buyout are outlined including the basic technicalities, the players, exit strategies, and possible outcomes. Finally, a case study is used to show the practical applications of a leveraged buyout. Last summer, I had the opportunity to work at Freeport Financial LLC, which provides capital and leveraged finance solutions to middle market companies with private equity investor ownership to support leveraged buyouts, recapitalizations, and corporate refinancing. The case study is based on a deal that I analyzed while working at Freeport.