What is not a factor that can increase IRR in an LBO?

In the context of a leveraged buyout (LBO), the internal rate of return (IRR) is influenced by several factors that can either enhance or diminish its potential. The ability of each component to positively impact IRR is crucial to understanding LBO dynamics.

A lower purchase price can certainly boost IRR. Acquiring a company at a reduced cost means that the initial investment is smaller, enabling greater returns when the company is eventually sold or when it generates cash flows. In essence, a lower initial investment means a higher percentage return over the investment duration.

The use of less equity, meaning a higher amount of debt in the capital structure, allows for magnifying the return on the equity portion. This leverage creates a scenario where, as long as the company performs satisfactorily and generates cash flows to service the debt, any gains in value are concentrated more in the equity holder's returns, thereby increasing IRR.

Higher revenue growth directly enhances cash flows, which, when generated on a larger scale, can lead to significant profitability. This profit, when coupled with a managed debt load, further increases the overall returns on the initial equity investment.

Higher interest rates, in contrast, typically exert a negative effect on IRR in an LBO scenario. When