What Is a Private Equity Firm?

A private equity company is an investment company that collects funds from investors to purchase stakes in businesses and help them grow. This is different from individual investors who purchase shares in publicly traded companies which pay dividends but does not give them any direct control over the company’s decisions and operations. Private equity firms invest in a set of companies, called a portfolio, and generally are looking to take over management of those businesses.

They typically identify a company that could be improved and purchase it, making adjustments to increase efficiency, reduce costs and allow the business to expand. Private equity firms can borrow money to purchase and take over businesses which is known as leveraged buying. They then sell the business for a profit and receive management fees from businesses that are part of their portfolio.

This cycle of buying, selling and improving can be time-consuming for smaller businesses. Many companies are looking for alternatives to funding options that will allow them access to working capital without having the management costs of the PE company added.

Private equity firms have fought back against stereotypes that portray them as strippers, by highlighting their management expertise as well as the successful transformations of portfolio companies. But critics, including U.S. Senator Elizabeth Warren, argue that the focus of private equity on making quick profits erodes the value of the company and harms workers.

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