Private Equity: Episode 20 – The Different Types of LBOs
The LBO in PE
In Episode 5, I provided some examples of the existing types of LBOs. We will revisit this list and explain each of them in detail. The main forms encountered are:
- Management Buy-Out (MBO)
- Management Buy-In (MBI)
- Buy-In Management Buy-Out (BIMBO)
- Owner Buy-Out (OBO)
- Leverage Build-Up (LBU)
Management Buy-Out (MBO): This refers to the situation where the management team of a company buys it out. The holding company facilitating the deal is majority-owned by the managers, with a minority stake held by an investment fund. This type of deal might occur when a founder wants to transfer their company to their top management team, or when a group decides to divest one of its subsidiaries or business units in a carve-out. The fund participates in this arrangement to complement the managers' capital.
Management Buy-In (MBI): Similar to the MBO, the key difference is that the managers purchasing the company are not former employees; they are entirely external to the company.
Buy-In Management Buy-Out (BIMBO): This involves a company being bought by an external investor (either purely financial or a team of managers) in partnership with the management of the target company (founders and/or C-level executives). An investment fund may also participate to complete the financing.
Owner Buy-Out (OBO): In this structure, the target company is bought by a holding company whose capital is owned by both the seller and the buyers. For example, a leader who wants to gradually sell their company to their top management might proceed this way, remaining the majority shareholder of the holding company and integrating the teams. Variants include a majority OBO (as in the example above), a minority OBO (the reverse), and family OBOs (sales between heirs). An investment fund can also join the holding company to finance growth and development operations for the business.
Leverage Build-Up (LBU): This is a structure in which an investment fund buys a company with the aim of driving it toward external growth. The capital injected into the target company is used to acquire other companies. Over time, this strategy helps consolidate the leading company and build a group that can become a significant player in its industry.
All of these operations can be complemented by borrowings, just like in the LBO (see Episode 19).
In upcoming episodes, we will present real-life examples of these types of LBOs.