The financial structure of a LBO is that a PE fund uses the assets of an acquired company to pay for the acqusition. They generally put little if any of their own money down other than as earnest capital. They then take out additional loans using the acquired company assets as collateral and pay themselves distributions out of those loans. The acquired company is left to repay the massive and increasing debts.

You don't hear about the successful LBOs...because they're extremely rare. The only LBOs that worked out for the acquired companies are for those like Hilton, which occurred right before interest rates dropped, allowing the acquired companies to refinance their debts at lower rates than incurred by the LBO. The recession that occurred right after that LBO also let them fire tens of thousands of workers and shutter hundreds of locations and blame the recession rather than the shitty PE management and pillaging.

Toys R' Us and Neiman Marcus are the prototypical LBOs. Whether or not the LBO succeeds, PE gets rich, everyone else gets screwed.

There's a great CNBC show called "The Profit" which really makes it easy for a layman to understand how private equity works. On the show, it's interesting to see how the investor who is putting up his money is often uninterested in investing in a company that's growing quickly and making good profit margins.

I can only speculate on what the investor's true motivations is. But there was one episode in particular which was interesting:

1) The investor came in, offered up a few hundred thousand dollars for a 51% stake

2) He immediately had the company upgrade their equipment, purchasing new equipment

3) Eighteen months later, the company was bankrupt

When all the dust settled, the company was re-packaged and sold to another company, the original owners were gone, and the manufacturing was sent overseas.

When the investor was having them buy a bunch of equipment, I was definitely wonder if his prime motivation was to simply have some tangible assets that he could recover once the inevitable bankruptcy occurred.

It’s way, way more complicated than that. There are the LPs, who sometimes have clients / constituents, GPs, who can be complex entities or individuals or both, operating partners, banks, who obviously wouldn’t lend for LBOs if every one of them busted, equity owners of the target, debt holders of the target, management of the target. All of these parties have their own incentive structures which are lined up in order for an LBO to take place.