Institutional Buyout

What Does Institutional Buyout Mean?

An institutional buyout (IBO) is a buyout initiated by institutional investors such as venture capital or private equity groups. The financial institution takes over a firm and then backs the group of managers who will run it. The financial institution acquires a controlling interest in the firm.

Institutional buyout are also commonly called leveraged buyouts when they are initiated buy private equity firms.

Divestopedia Explains Institutional Buyout

Buyout involves the transition from one set of owners to another. A buyout is the purchase of at least a 51% stake in a firm. The previous ownership loses control over the firm, and the purchaser pays a premium for shares that gives it controlling interest in the firm.

Nearly all buyouts occur because the purchaser believes that it can provide more value to a firm than the firm’s current management. The institution acquires the firm directly from the vendor and provides incentives, such as equity, to the management. The institutional investor negotiates the price to be paid for the target and the equity percent that the management team will in turn receive. This allows the existing proprietor to realize value without the necessity of selling the firm.

An institutional buyout is similar to a vendor-initiated management buyout, where the vendor offers management an equity stake in exchange for funds. Thereby, the price is maximized and the vendor remains in control. The investor in IBO would dispose of its stake in a firm within a certain time frame.