What is a common source of capital for a Leveraged Buyout (LBO)?

In a Leveraged Buyout (LBO), a common source of capital involves the use of various types of debt financing, which are crucial for the structure of these transactions. The correct answer outlines that financing typically comes from a revolver (a committed credit line), bank debt (senior loans), and high-yield bonds (subordinated debt).

This combination allows the acquiring firm to leverage its equity investment by borrowing a significant amount, making it possible to finance a large portion of the purchase price with borrowed money. The strategy maximizes returns for equity holders since they are investing relatively less of their own capital while using leverage to amplify their potential gains from the investment.

Incorporating debt also serves the purpose of allowing the target's cash flows to be used to service the debt over time, making it a compelling way to finance acquisitions, provided the cash flows are robust enough to manage the debt obligations.