What is the target internal rate of return (IRR) typically aimed for in LBO investments?

In leveraged buyout (LBO) investments, the target internal rate of return (IRR) is generally aimed to be within the range of 20-30%. This range reflects the high-risk nature associated with LBO transactions, where investors typically finance a significant portion of the purchase price with debt. The use of leverage amplifies both potential returns and risks, making it essential for private equity firms to target higher IRRs to compensate for these risks.

Investors in LBOs seek to achieve substantial returns on their equity investment, usually culminating in a successful exit through mechanisms like a sale or initial public offering (IPO). The expectation of achieving 20-30% IRR indicates the strong performance anticipated as a result of operational improvements, debt paydown, and multiple expansion over the investment period.

Choosing a target IRR outside this range, such as lower than 20% or higher than 30%, may either reflect less aggressive growth expectations or may not be justifiable in a market context where competitive returns are essential for attracting investors. Therefore, aiming for an IRR within 20-30% strikes a balance that meets the financial goals of private equity investors while accounting for market realities and the inherent risks of leveraged transactions.