What Is a Private Equity Firm?

Private equity firms are an investment company that collects funds from investors to purchase stakes in businesses and help them grow. This is different from private investors who purchase stock in publicly traded companies, which gives them the right to dividends, but has no direct effect on the company’s decision-making and operations. Private equity companies invest in groups of companies, referred to as portfolios, and try to take over the management of these businesses.

They usually identify a business that has room for improvement and buy it, implementing adjustments to increase efficiency, reduce expenses and help the business expand. In some instances private equity firms utilize the use of debt to purchase and take over a business called a leveraged buyout. They then sell the company at a profit, and collect management fees from companies that are part of their portfolio.

This cycle of selling, buying, and improving can be time-consuming for smaller companies. Many are looking for alternative financing methods that permit them to access working capital without the added burden of the PE firm’s management fee.

Private equity firms have fought back against stereotypes that portray them as strippers of corporate assets, highlighting their management expertise and examples of transformations that have been successful for their portfolio businesses. Some critics, like U.S. Senator Elizabeth Warren, argue that private equity’s obsession with making rapid profits damages the long-term value and is detrimental to workers.


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