What is a leverage buyout (LBO)?

A leverage buyout (LBO) is characterized primarily by its reliance on borrowed funds to finance the acquisition of a company. In an LBO, the acquirer uses a significant amount of debt in conjunction with a smaller amount of equity to purchase the target company. This structure amplifies potential returns on equity, as the acquirer seeks to benefit from the operational efficiencies, cash flows, and potential asset appreciation of the firm being acquired.

The use of borrowed funds is central to the LBO model because it allows the acquirer to leverage their investment, increasing the potential for high returns on equity. Typically, the target company's assets and earnings are used as collateral for the debt incurred in the process.

The other options do not accurately capture the fundamentals of an LBO. Equity financing is not the main characteristic of an LBO, which instead focuses on the significant usage of debt. Additional stock issuance and asset liquidation strategies pertain to other forms of acquisitions or post-acquisition strategies and do not define the essence of an LBO.