What does the Federal Reserve (Fed) do, and how does it influence the markets?The Fed operates under what is called a dual mandate, meaning that it has two primary tasks that it works to accomplish: maximum sustainable employment (unemployment around 4%) and stable prices (inflation around 2%). There are four "conventional" monetary policy tools that the Fed utilizes: 1) open market operations (OMO), 2) reserve requirement ratio 3) discount window/rate and 4) interest on rese...
In order to understand what a Leveraged BuyOut, or "LBO," is we need to zoom out a bit and look at an investment portfolio as a whole. Say there is an institutional investor--these include pension plans, university endowments, foundations, insurance companies, high net worth individuals--who is looking to allocate money. There are several options: equities (stocks), fixed income (buying a company's debt security), real estate, and alternatives. These four types are called "asset classes". Under alternatives, the last aforementioned asset class, can be broken up into private equity, or any investment that is not public/not traded on an exchange, and hedge funds. Private equity further breaks down into venture capital (VC), growth equity, and LBO. These are investments across a company's life cycle with VC being an investment in a startup, growth equity an investment in an established but growing company/industry, and LBO an investment in a mature company with strong and lengthy track record.
This is how we get to LBO from the initial steps of deciding how to allocate funds for investment. The three key elements of an LBO are leverage, control, and going private. A leveraged buyout is the acquisition of a public or private company with a significant amount of borrowed funds, or debt usually 50% - 85% of the purchase price-- hence the name leveraged. The company becomes p...
