The term 'leveraged buyout' has lost popularity over recent years, but the use of leverage is still a key driver of returns. It works like this: At acquisition: If a deal is funded by a mixture of equity and debt - using the target company’s cash flow as collateral - then it lowers the cost at acquisition. During ownership: Interest payments (from debt) lower the tax rate throughout ownership, while dividend payments (from equity) do not. Overall, the cost of financing is reduced when a deal is funded with debt, which acts as a lever to increase returns - hence leverage'.