As Buy-Outs became larger and more levered in the mid 2000 s the European Leveraged Finance
market experienced a wave of innovations. This research is concentrating on the capitalisation
process of leveraged Buy-Outs in Europe taking the perspective of an equity investor. We
embark on the quest for the optimal capital structure by constructing an integrated model based
on traditionalist (irrelevance hypothesis) and modernist (tax risky debt and costly
contracting hypothesis) views. In a second step we review common terms of financing instruments
used in European Buy-Outs (ie. Senior debt Mezzanine High Yield Preferred Equity Equity) in
the light of these theoretical insights. Finally the capitalisation process is embedded in a
broader framework for value levers in Buy-Out transactions and an outlook on further research
is given. This research provides a solid review of relevant literature on capital structure
(eg. Modigliani & Miller Agency Theory) and can be used as an introduction for the
inexperienced reader. The consistent mapping of common financing terms against relevant
theoretical hypothesis is unique among related literature.
