What is the main benefit of using high amounts of debt in Leveraged Buyouts (LBOs)?

Using high amounts of debt in Leveraged Buyouts (LBOs) primarily allows investors to acquire larger companies than they could with just their own capital. This strategy involves financing a significant portion of the purchase price with borrowed funds, which amplifies the purchasing power of the private equity firm conducting the buyout. By leveraging debt, firms can capitalize on the target company's cash flows to service this debt, enabling them to take control of businesses that would otherwise be beyond their immediate financial capability. This approach is advantageous as it increases potential returns on investment, provided the acquired company performs well and can manage the debt repayment.

While it is true that leveraging can result in higher returns, it does not guarantee them, as the performance of the company is a significant factor. Additionally, using debt does not eliminate the financial risk for investors, nor does it completely remove the need for equity; equity remains important to balance the capital structure and support the company’s long-term sustainability.