Understanding Private Equity's LTV (Loan to Value) ratio

The debt-to-equity ratio or LTV (Loan To Value) is a financial indicator that measures the amount of a loan borrowed in relation to the total value of the asset financed.

More precisely, this ratio calculates the amount of the loan used to purchase an asset, in relation to the total value of the asset. LTV is an important indicator for private equity investors, as debt-to-equity ratios are a convenient way of knowing how much of a loan an investor can obtain, and negotiating participants can adjust the terms of the loan according to the value of the asset being financed.

For example, if the LTV is 80%, this means that the lender will provide up to 80% of the total acquisition cost of the asset financed, while the remaining 20% of the funds will have to be provided by the negotiating parties.

In general, lenders look for as low an LTV ratio as possible, as the higher the amount of the asset financed, the riskier the investment.