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Exactly. These looks are made all the timer because lenders make money on them. LBOs happen all the time because most parties make money.
by formercoder 6y ago
Exactly. These looks are made all the timer because lenders make money on them. LBOs happen all the time because most parties make money.
- netcan 6y agoI would throw in a bunch of caveats... I'm OK with "because lenders make money on them" as a generality. ...As long as we are honest about what an LBO is. It is an arbitrage, of sorts. The deals are, by definition and in practice, structured to give the acquiring PE a free option. Their risk lasts only as long as they have skin in the game, usually a short period. Since they structure the deal, they structure it in a way that eliminates (as much as they can) short term risks. The old fashioned way of doing this is took a few years. (a) Raise enough debt and run extreme short-term management strategies. (b) make interest payments religiously. (c) Use this history of payments to raise enough money to pay yourself out fully. (d) sell the now indebted company, run it, or whatever. Any dollar you make is profit on a zero dollar investment. It's a risk arbitrage, more specifically. In a liquid market, this arbitrage wouldn't exist, but if it did it would look like this: (1)Buy shares in Tesla. Put it in a LLC (2) Borrow money under LLC, interest only (3) Pay this money to yourself. (4) Sell shares as necessary to pay interest (5) pay yourself when you deserve a treat (6) If you run out of shares and no one is willing to lend you more money... the game is now finished.