A
leveraged buyout (
LBO) is a transaction when a company or single
asset (e.g., a
real estate property) is purchased with a combination of
equity and significant amounts of borrowed money, structured in such a way that the target's
cash flows or assets are used as the collateral (or "leverage") to secure and repay the borrowed money. Since the debt (be it
senior or
mezzanine) has a lower
cost of capital (until
bankruptcy risk reaches a level threatening to the lender[s]) than the equity, the returns on the equity increase as the amount of borrowed money does until the perfect
capital structure is reached. As a result, the debt effectively serves as a lever to increase returns-on-investment.