Who bears the debt after an LBO deal closes?

Who bears the debt after an LBO deal closes?

• A. The PE firm personally guarantees the debt
• B. The company formed by the acquisition assumes the debt
• C. The original owners remain liable
• D. The banks guarantee the debt

Answer: (B)

In an LBO, the financing burden sits on the acquisition vehicle created to buy the target. The purchase is funded with debt raised by that new company, and the debt becomes the obligation of that acquisition entity (often secured by the target’s assets and cash flows). The private-equity sponsor provides the equity, but does not personally guarantee the debt. The original owners exit and are generally not liable for the new debt. Banks don’t guarantee the debt; they loan it and take collateral. So the company formed to acquire the target assumes the debt.

In an LBO, the financing burden sits on the acquisition vehicle created to buy the target. The purchase is funded with debt raised by that new company, and the debt becomes the obligation of that acquisition entity (often secured by the target’s assets and cash flows). The private-equity sponsor provides the equity, but does not personally guarantee the debt. The original owners exit and are generally not liable for the new debt. Banks don’t guarantee the debt; they loan it and take collateral. So the company formed to acquire the target assumes the debt.