Private equity firms' leveraged buyout deals are looking like huge losses

Barron's - Ka-Boom!

A Leveraged Buy-Out (LBO) is a deal where a financial institution (private equity firm) buys a company by issuing bonds against the company it's about to buy. The cash flow from the acquired company pays the interest on the bonds while the private equity firm manages it, then sells it off in an 'exit strategy'. This is supposedly a 10-year process-- raising the capital to 'leverage', buying the company, then selling it and giving money back to the original investors, presumably at a large profit. Of course the private equity firm keeps a healthy sum (20%) plus 1.5% of all the pledged (not necessarily originally invested or market value) money. The problem now is that the debt payments continue as company revenues are shrinking; it looks as though the total debt eclipses the entire value of a company, making equity-ownership (that which private equity firms created so much debt to purchase) worth nothing. Not only are many private equity firms not admitting this by refusing to use similar accounting practices that public companies use, but the effects of these problems might not be felt until much later down the line. One of the current problems with the structure of a company that's been 'taken private' is the huge debt burden it now has; its competitive ability is dramatically reduced: the article mentions a few case studies, notably Linens 'n Things (private equity owned with an LBO, now out of business) vs. Bed, Bath, and Beyond (publicly traded).