What Is a Private Equity Firm?

A private equity company is an investment firm which raises money to help companies grow by buying stakes. This is different from individual investors who invest in publicly traded companies. This gives them the right to dividends, but has no direct effect on the company’s decision-making process and operations. Private equity firms invest in groups of companies called portfolios and attempt to take control of these businesses.

They typically purchase an organization that has potential for improvement, and then implement changes to improve efficiency, cut costs, and expand the business. In some cases private equity firms make use of debt to purchase and take over a business, known as a leveraged buyout. They then sell the business for a profit and take management fees from the companies in their portfolio.

This recurring cycle of buying, enhancing and selling can be time-consuming and costly for businesses particularly small ones. Many companies are looking for alternative funding methods to allow them access to working capital without the management fees of a PE company added.

Private equity firms have fought back against stereotypes that paint them as corporate strippers assets, and have emphasized their management expertise and examples of successful transformations of their portfolio businesses. But critics, like U.S. Senator Elizabeth Warren, argue that the focus of private equity on making quick profits erodes the value of the company and is detrimental to workers.


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