In an LBO, what is primarily used to finance the purchase of a company?

In a leveraged buyout (LBO), the purchase of a company is primarily financed through a combination of cash and debt. This approach allows the acquiring firm to use a relatively small amount of its own capital while leveraging the target company's assets and future cash flows to secure debt financing.

Using debt as a significant part of the financing structure is a hallmark of LBOs because it can amplify returns on equity when the investment performs well. The debt raises the total capital available for the purchase, which enables the private equity firm to acquire larger companies or invest in more deals than it could using equity alone.

In contrast, relying solely on equity from investors would limit the acquisition scale, thus not maximizing potential returns. Government grants and loans are not standard instruments in financing LBOs since the nature of LBOs usually involves private investment rather than direct governmental funding. Lastly, relying on equity from public markets does not fit the typical structure of an LBO, as these transactions are generally private in nature, specifically targeting private companies or division spin-offs rather than public companies.

Hence, the combination of cash and debt is the correct choice as it reflects the operational mechanics of LBOs, allowing for strategic financial leverage to achieve desired investment outcomes.