What Is a Private Equity Firm?

Private equity firms are an investment firm that raises money from investors to buy stakes in companies and assist them expand. This is different from individual investors who purchase shares in publicly traded companies and receive dividends, but doesn’t grant them direct influence over the company’s operations and decisions. Private equity firms invest in a group of companies, known as a portfolio, and usually seek to take over the management of these businesses.

They typically purchase an enterprise that has room for improvement. They then make changes to improve efficiency, cut costs, and expand the business. In certain cases private equity firms employ the use of debt to purchase and take over a business also known as leveraged buyout. They then sell the company for profit and receive management fees from the companies within their portfolio.

This cycle of selling, buying, and upgrading can be very time-consuming for smaller businesses. Many companies are searching for alternative methods of financing that can give them access to working capital without the management fees of an PE firm.

Private equity firms have fought back against stereotypes portraying them as strippers, highlighting their management expertise as well as the successful transformations of portfolio companies. Some critics, including U.S. Senator Elizabeth Warren argues that private equity’s primary goal is quick profits, which damages long-term values and harms workers.


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