What does a higher leverage indicate for private equity firms?

Higher leverage indicates that a private equity firm is using a significant amount of debt in financing its acquisitions. This approach can amplify potential returns because it allows firms to invest more capital than they could using equity alone. When successful, the investments may yield higher returns on equity since the firm is primarily funding the acquisition with debt, which must be paid back regardless of the investment's performance.

However, higher leverage also means that the firm is taking on more risk. The use of debt increases the financial obligations of the firm, which can lead to greater volatility in returns. If the acquisitions do not perform well, the burden of repayment on the debt can magnify losses, illustrating the trade-off between risk and return.

In summary, while higher leverage can lead to enhanced returns, it also introduces greater volatility and potential for losses, making option B the most appropriate choice in this context.