Financial Engineering in Private Equity’s Transactions ; The Leveraged Buyout Operative

Abstract

Private Equity applies Leveraged Buyout as the main way of investment with the objective of reducing the contributions they make and obtaining higher IRRs. The LBO operative is considered financial engineering due to the complex structure it entails and that, using a company created ad hoc (Newco) and offering the assets and future cash flows of the target company as guarantees of the money borrowed for carrying out the investment, the risk of PEs is reduced to very low levels. In addition, due to the high levels of indebtedness that the LBOs suppose and making the management team to be shareholders of the target company, the value creation has place is and the agency costs are greatly reduced. Through the study of the acquisition of the proposed company Bolsas y Mercados Españoles as a possible investment by LBO, it has been proven that it is a transaction that meets the profitability requirements of the Private Equities either under the conditions and hypotheses that have been used or in more adverse conditions in terms of buying and selling price of the company. The transaction offers such high level of IRR that if the financial transaction tax is finally put in force, a priori, would not impede the decision of investing.