The hurdle rates required to proceed on an LBO are typically above which percentage?

The hurdle rates required to proceed on an LBO are typically above which percentage?

• A. Above 15%
• B. Below 10%
• C. Exactly 15%
• D. Between 8% and 12%

Answer: (A)

In a leveraged buyout, the hurdle rate is the minimum return that equity investors require to take on the deal. Because such deals rely heavily on debt, the equity portion bears significant risk and must compensate for both the financial risk and the leverage used. This tendency toward higher risk-adjusted returns means sponsors set hurdle rates higher than modest levels, commonly aiming for returns well above 15%. That’s why the correct idea is that hurdle rates are typically above 15%. In practice, many LBOs target even higher IRRs, often in the 20–25% range, to account for deal risk and financing gaps.

In a leveraged buyout, the hurdle rate is the minimum return that equity investors require to take on the deal. Because such deals rely heavily on debt, the equity portion bears significant risk and must compensate for both the financial risk and the leverage used. This tendency toward higher risk-adjusted returns means sponsors set hurdle rates higher than modest levels, commonly aiming for returns well above 15%. That’s why the correct idea is that hurdle rates are typically above 15%. In practice, many LBOs target even higher IRRs, often in the 20–25% range, to account for deal risk and financing gaps.