LBO Buy-Side

LBO Buy-Side

This article is specifically about LBOs on the buy-sideBuy-SideInstitutional asset managers, known as the Buy Side offer a wide range of jobs including private equity, portfolio management, research. Learn about the job of corporate finance. In a leveraged buyout (LBO)Leveraged Buyout (LBO)A leveraged buyout (LBO) is a transaction where a business is acquired using debt as the main source of consideration. An LBO transaction typically occur when a private equity (PE) firm borrows as much as they can from a variety of lenders (up to 70-80% of the purchase price) to achieve an internal rate return IRR >20%, a private equity firm uses as much leverage as possible to acquire a business and maximize the internal rate of returnInternal Rate of Return (IRR)The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment. (IRR) to equity investors. LBO buy-side entities include private equity firms, life insurance companies, hedge funds, pension funds, and unit trusts. These entities have pools of funds that they are ready to invest in profitable ventures, to generate returns either for themselves or for their clients. They rely on sell-sideBanking (Sell-Side) CareersThe banks, also known as Dealers or collectively as the Sell-Side, offer a wide range of roles like investment banking, equity research, sales & trading reports to carry out their own analysis and make recommendations.

Read more about LBO modelsLBO ModelAn LBO model is built in Excel to evaluate a leveraged buyout (LBO) transaction, the acquisition of a company funded using a significant amount of debt., and if you want to learn how to build one from scratch, then check out CFI’s LBO Modeling Course.

What is the Work of a Buy-Side Analyst?

Buy-side analysts Buy Side AnalystA buy side analyst is an analyst who works with fund managers in mutual fund companies, financial advisory firms, and other firms, such as hedge funds, trusts, and proprietary traders. These firms buy large portions of securities for fund management. Recommendations made by buy side analysts are confidentialwork in non-brokerage firms, and they conduct research on potential investments and give recommendations to the company’s money managers. Unlike sell-side reports (equity researchEquity Research OverviewEquity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in.  The Equity Research Division is a group of analysts and associates. This equity research overview guide) that are made public, buy-side recommendations are kept confidential. The aim of buy-side firms is to identify and purchase underpriced assets, and to earn high returns on their investments.

In a situation where the buy-side analyst conducts market research and identifies a high performing company that is being sold, he isolates that information so that other investors do not influence a price hike. If he is convinced that the business is profitable and the stock is competitive, he makes a buy recommendation to the firm or to high-powered clients. If both parties agree that the company is worth investing, then they go ahead in financing the purchase, with a mix of both equity and leveraged debt to ensure higher returns on investment.

The buy-side analyst’s success is measured based on the number of profitable recommendations that he makes, with the aim being to buy low and sell high. They earn commissions and bonuses on every successful investment.

Buy-Side LBO Models

Below is an example of a financial model used in an LBO transaction.  There are many types of financial modelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types, and LBOs are just one of them.

To learn more, browse CFI’s financial modeling courses.

Buy-Side vs. Sell-Side

In a leveraged buyout, there is a sell-side and a buy-sideBuy Side vs Sell SideBuy Side vs Sell Side. The Buy Side refers to firms that purchase securities and include investment managers, pension funds, and hedge funds. The Sell Side. The sell-side entities comprise brokerage firms such as investment banks, stockbrokers, and market makers. They keep track of stocks and the performance of various companies, which they analyze, and generate research reports. The reports are usually made available to the public. The LBO buy-side entities take up these reports to do their own analysis and make recommendations to their seniors. Buy-side entities take speculative positions and aim to gain from market movements and accruals.

Use the resources listed below to learn more about the buy-side vs. sell-side in M&ABuy Side vs Sell Side M&AThe buy-side means working with buyers in opportunities for them to acquire other businesses. Sell-side M&A means working with the sellers..

Additional Resources

CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)™ certificationFMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari , designed to transform anyone into a world-class financial analyst. To learn more and advance your career, these supplemental CFI resources will be helpful:

• Types of Financial ModelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types
• Buy-side vs Sell-sideBuy Side vs Sell SideBuy Side vs Sell Side. The Buy Side refers to firms that purchase securities and include investment managers, pension funds, and hedge funds. The Sell Side
• Buy-side AnalystBuy Side AnalystA buy side analyst is an analyst who works with fund managers in mutual fund companies, financial advisory firms, and other firms, such as hedge funds, trusts, and proprietary traders. These firms buy large portions of securities for fund management. Recommendations made by buy side analysts are confidential
• M&A Buy-Side AnalystBuy Side vs Sell Side M&AThe buy-side means working with buyers in opportunities for them to acquire other businesses. Sell-side M&A means working with the sellers.