LBO Buy-Side
This article is specifically about LBOs on the buy-side 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 sets the net present value of an investment equal to zero. This guide to calculating IRR will give several examples and who why it's used in capital budgeting, private equity and other areas of finance and investing. If IRR is greater than cost of capital, (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 and 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 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, which is the acquisition of a company that is funded using a significant amount of debt. The aim of the LBO model is to enable investors to properly assess the transaction earn the highest possible internal rate of return (IRR)., and if you learn to build one from scratch 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 earn high returns on the 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 stocks are competitive, he makes a buy recommendation to the firm or high-powered clients. If both parties agree that the company is worth investing, they go ahead in financing the purchase, with a mix of both equity and leveraged debt, to ensure higher returns on investment.
The buy analyst 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 of Excel models in this detailed guide, including images and examples of each. Financial modeling is performed for many reasons including to value a business, raise money, and LBO is 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 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 refers to firms that issue, sell, or trade securities and includes investment banks, advisory firms, and corporations. Learn similarities and differences. The sell side entities comprise brokerage firms like investment banks, stockbrokers, and market makers. They keep track of stocks and performance of various companies which they analyze, and come up with 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&AAdvisers on buy side and sell side M&A transactions differ in terms of their roles and how they are compensated. The buy side means working with the buyers in opportunities for them to acquire other businesses.Sell side M&A, on the other hand, means working with the sellers.
Additional Resources
CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)™ certificationFMVA™ CertificationThe Financial Modeling & Valueation Analyst (FMVA)™ accreditation is a global standard for financial analysts that covers finance, accounting, financial modeling, valuation, budgeting, forecasting, presentations, and strategy. 
, designed to transform anyone into a world-class financial analyst. To learn more and advance your career, these supplemental 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 of Excel models in this detailed guide, including images and examples of each. Financial modeling is performed for many reasons including to value a business, raise money
- 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 refers to firms that issue, sell, or trade securities and includes investment banks, advisory firms, and corporations. Learn similarities and differences
- 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&AAdvisers on buy side and sell side M&A transactions differ in terms of their roles and how they are compensated. The buy side means working with the buyers in opportunities for them to acquire other businesses.Sell side M&A, on the other hand, means working with the sellers
