To give an illustrative example, you have a company that runs a care home. It owns the care home and employs the workers etc. So that company has a set of asse

To give an illustrative example, you have a company that runs a care home. It owns the care home and employs the workers etc. So that company has a set of assets, and a set of cash flows, let's say the care home it owns is worth $10m, and it makes a profit of $1m a year (totally made up numbers). It might be privately owned or public - that's not important. This has nothing to do with hostile takeovers - the sellers of the business are willing sellers. A buyer comes in and says "I'll buy this business for $15m". But the buyer doesn't have $15m, Let's say they have $5m. So they go to the bank and they agree to borrow $10m. But the bank won't just lend you $10m, they need collateral. So what the buyer does is they say "We'll borrow the $10m from you to buy the company, and the collateral we'll provide to the bank is the assets of the company, which we'll own once we've completed the acquisition". In a weird way it feels like buying the company with it's own money. So now, the private equity firm own the $15m business, but the business now has $10m in debt. The reason this is good for the private equity firm is that if they can increase the value of the business 10%, the business is now worth $16.5m and the PE firm reaps all the reward - they make $1.5m profit from a $5m investment, instead of making $1.5m from a $15m investment. It's a way of them making efficient use of their limited capital. Now, here's the bad side: That business that had $10m worth of assets, and made $1m profits? Well now it has $0m of net assets and it's got to make interest payments on the debt. So the Private Equity firm has to move quickly to squeeze more profits out of the business. It's like when Elon Musk bought twitter- he claimed he had to make a tonne of cuts because the business was hemorrhaging money, but the truth is it wasn't losing money until he saddled it with a huge amount of incredibly expensive debt.