This article investigates the nexus between private equity ownership, leverage decisions, and the dynamics of financial distress in leveraged buyouts (LBOs). Building on a rich empirical and theoretical literature, the study synthesizes evidence on why buyouts employ high leverage, how capital structure influences operational incentives and governance, and the consequences of distress for firm value and creditor outcomes. The manuscript integrates classical views on the role of debt as a disciplinary device with modern perspectives emphasizing contractual design, reputation, and strategic default. It examines the trade-offs implicit in high leverage—between tax shields and bankruptcy costs—while also detailing how debt composition, payment-in-kind (PIK) amendments, and covenant structures shape bankruptcy thresholds and renegotiation outcomes. The study further explores reverse leveraged buyouts and the channels through which private equity exits are realized, assessing value realization under different macroeconomic and industry conditions. Methodologically, the article adopts a rigorous, text-based synthesis approach: theoretical reasoning is combined with exhaustive narrative analysis of principal empirical contributions to derive implications for practitioners and policymakers. Empirical generalizations are drawn primarily from seminal and recent working papers and peer-reviewed studies on buyouts, distress costs, and private equity contracting. The results synthesize consistent patterns: (1) leverage amplifies both returns and downside risk, (2) governance improvements and strategic restructuring under private equity ownership can mitigate a portion of financial distress costs but do not eliminate them, and (3) contractual design—especially debt composition and covenants—plays a decisive role in shaping the path and severity of financial distress. The discussion elaborates on nuanced mechanisms such as reputation effects, information asymmetries between sponsors and creditors, and the role of banks and bondholders as strategic agents in distress. Limitations of the synthesis approach are acknowledged and directions for future empirical and theoretical research are articulated. This comprehensive review offers a coherent framework for understanding how private equity sponsors deploy leverage to create value and how capital-structure choices mediate the transition from leverage-induced discipline to debilitating financial distress. (Word count: 312)

Private equity, leveraged buyouts, financial distress, capital structure

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