How PE firms add value

CFA Level II Alternative Investments
#1

n the case of buyouts, the use of debt can reduce the tax payments made by the company and also
reduce the cost of capital. There may also be opportunities in certain market conditions to take advantage of any mispricing of risk by lenders, which can allow the private equity funds to take advantage of interest rates that do not fully reflect the risks being carried by the lenders. Many would point to var- ious periods from 2015 to 2019 when government interest rates were low, debt spreads were tight, and/or lender covenants were loose as examples of such prevailing conditions.

Tekenn directly from the text. Can someody explain this?How does this add value?? Wont the company that is brought out have to pay more interest and the debt obligation will also rise?

#2

i think this has to do with the ability of the PE firms to obtain more favorable debt terms compared to the target company.

in the text, it says that “in certain market conditions to take advantage of any mispricing of risk by lenders”. From what i understand, the existing lenders of the target company may miscalculated the risk for the target company and issue a higher interest cost. What PE firm does in leveraged buyout is to take advantage of this mispricing of risk and able to borrow at much more favorable rate. kind of like a “big-brother” thing. this is one way how PE firms add value in a leverage buyout.