In a traditional LBO, debt has typically comprised 60% to 70% of the financing structure, with the remainder of the purchase price funded by an equity contribution from a Private equity fund. Let’s go through each of the debt and equity components in detail.

We have grouped the primary types of LBO financing sources into the categories shown here, corresponding to their relative ranking in the capital structure.

The debt portion of the LBO financing structure may include a broad array of loans, securities, or other debt instruments with varying terms and conditions that appeal to different classes of investors.
As a general rule, the higher a given debt instrument ranks in the capital structure hierarchy, the lower its risk, and consequently the lower its cost of capital to the borrower or issuer. However, cost of capital tends to be inversely related to the flexibility permitted by the applicable debt instrument. For example, bank debt usually represents the least expensive form of LBO financing. At the same time, bank debt is secured by various forms of collateral and governed by maintenance covenants.

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