When adjusting the Balance Sheet in an LBO, what happens to Shareholders' Equity on the Liabilities & Equity side?

When adjusting the Balance Sheet in an LBO, what happens to Shareholders' Equity on the Liabilities & Equity side?

• A. Equity is increased
• B. Equity remains unchanged
• C. Equity is diluted by a partial equity issue
• D. Equity is wiped out and replaced by PE equity

Answer: (D)

In an LBO, the purchase is financed with a large amount of debt and new equity from the private equity sponsor. When the deal closes, the existing shareholders are paid out, and the company’s ownership is transferred to the sponsor. In the pro forma balance sheet, the target’s historic shareholders’ equity is effectively extinguished and replaced by the sponsor’s equity contributed to finance the buyout. So the Shareholders’ Equity line on the Liabilities & Equity side becomes the PE equity, reflecting the new ownership structure. The debt raised to fund the purchase increases liabilities, but the equity side shows the sponsor’s stake rather than the old equity.

In an LBO, the purchase is financed with a large amount of debt and new equity from the private equity sponsor. When the deal closes, the existing shareholders are paid out, and the company’s ownership is transferred to the sponsor. In the pro forma balance sheet, the target’s historic shareholders’ equity is effectively extinguished and replaced by the sponsor’s equity contributed to finance the buyout. So the Shareholders’ Equity line on the Liabilities & Equity side becomes the PE equity, reflecting the new ownership structure. The debt raised to fund the purchase increases liabilities, but the equity side shows the sponsor’s stake rather than the old equity.