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Financial glossary

L

Leveraged buyout (LBO)

A leveraged buyout (LBO) is a technique used by an investor to purchase a company (the target) using three different types of leverage:

  • Legal leverage: The operation will be structured using a holding company which will purchase shares of the target. As a consequence, controlling 50% of the holding company which owns 50% of the target shares will enable an investor to control the target while having paid for only 25% of its capital. This leverage can be increased by using several successive holding companies.
  • Financial leverage: The holding company will generally issue a large amount of debt to finance the transaction. Dividends of the target which are paid to the holding company will then be used to service the debt.
  • Fiscal leverage: Generally, dividends generated by the target and paid to the holding company can be exempt of taxes. Furthermore, if certain criteria are met, the target’s income can be consolidated with the holding company’s income to potentially reduce global income taxes (if the holding’s income is negative).

An LBO is a risky investment which, in general, could last between three and seven years.

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Libor

London interbank offer rate (LIBOR) is the average rate at which major banks in London would be charged to borrow funds in the interbank market. Libor rates are published on a daily basis for 10 currencies and 15 borrowing periods. As Libor rates are calculated through submissions, they are subject to manipulation. Such manipulation was the cause of the “Libor scandal” revealed in June 2012.

Life cycle fund

A life cycle fund is a mutual fund in which global asset allocation shifts gradually towards lower risk assets as time passes. Life cycle funds are appropriate for investors who want their investments to be automatically and progressively switched to more secure assets for example as they near retirement.

Limit order

A limit order is an order to buy (sell) a given asset at a maximum (minimum) price. While enabling investors to control their executions, it limits their ability to fulfil orders. A limit order is opposed to a market order, where execution is achieved immediately in the market whatever the price.

Liquidity risk

The liquidity risk refers to the risk of selling (buying) a security at a price significantly lower (higher) than its intrinsic value due to a lack of market participants trading it.

Loan

A loan is a debt instrument under which the borrower owes the lenders (generally banks) a debt and is obliged to pay them periodic interest payments and to repay the principal by a given maturity date. Unlike bonds, loans are generally non-tradeable.