How a deal gets paid for

PE firms almost never pay the full purchase price in cash. A meaningful chunk is borrowed, acquisition debt, against the target company's own cash flow, with the fund contributing the rest as equity. The ratio between them is leverage.

Why borrow at all

Why borrow at all, rather than just paying cash? Because it makes the fund's own capital go further: if a fund puts in £64m of equity instead of £160m of cash, it can do 2-3 deals with the same amount of capital instead of one, and, as Lesson 20 will show directly, a smaller equity check against the same equity-value gain produces a much higher return multiple. Leverage doesn't create value on its own; it changes whose money captures the value that's created, and how concentrated the return is on the equity that was actually put in.

  • Meridian, £160m enterprise value: a typical structure might be 60% debt (£96m), 40% equity (£64m), figures this course carries forward into Lesson 20's return math.
£160m enterprise value, financed in one bar.

Checkpoint

  • Acquisition debt: borrowed against the target's own future cash flow, not the buyer's balance sheet.
  • Leverage: the ratio of debt to equity in the deal structure.
  • Leverage concentrates returns: on a smaller equity base; it doesn’t by itself make the underlying business more valuable.

If anything here still feels unclear, ask before moving to Lesson 16.