In the mortgage analogy for an LBO, which does the 'Down Payment' correspond to?

• A. Mortgage: Debt in LBO
• B. Down Payment corresponds to Investor Equity in an LBO
• C. Mortgage Interest Payments correspond to Debt Interest
• D. Selling the House corresponds to Selling the Company

Answer: (B)

Think of the house purchase: you pay a portion of the price with your own cash up front, and you borrow the rest. In an LBO, the deal is funded with a mix of debt and equity, with the equity investors putting up cash at the start and the debt financing the remainder. That upfront cash from the sponsors is the equity contribution in the LBO, which is exactly what the down payment represents. It shows the amount of the purchase funded by the buyers’ own money and signals their stake and risk in the deal. The mortgage payments and interest are about servicing the borrowed funds, and selling the house is like selling the company at exit. So the down payment lines up with investor equity in an LBO.