What is the main benefit for private equity firms to use leverage when acquiring a company?

Private equity firms often utilize leverage when acquiring a company primarily to enhance potential investment returns. By financing a significant portion of the acquisition with debt, the firms can significantly reduce the amount of equity capital they need to invest. This use of leverage allows them to control a larger asset with a smaller equity stake.

When a private equity firm employs leverage, it magnifies both the potential gains and losses. If the acquired company's value increases, the returns on the equity investment can be substantial, since the equity holders benefit from the increase in the total value while only investing a fraction of that total in equity. For example, if a private equity firm buys a company for $100 million—financing $80 million with debt and investing just $20 million of its own capital—the firm stands to gain significantly if the company's value appreciates. When the firm eventually sells the company at a higher price, the return on the $20 million equity investment can be much higher than it would be in an all-equity purchase.

While other options touch on relevant aspects of financial management, they do not encapsulate the core rationale behind the use of leverage in private equity acquisitions. Specifically, increasing the equity investment requirement would be counterintuitive to the purpose of leveraging, and reducing overall investment