A private equity company is an investment firm which raises money to help companies grow by purchasing stakes. This is different from private investors who purchase shares in publicly traded companies that pay dividends but does not give them direct influence over the company’s decisions or operations. Private equity firms invest in a collection of companies, also known as a portfolio, and generally look to take over management of these businesses.
They often identify a target company that could be improved and then purchase it, making adjustments to increase efficiency, reduce costs and help the business grow. Private equity firms may use debt to buy and take over businesses which is known as a leveraged purchase. They then sell the company for a profit and collect management fees from companies that are part of their portfolio.
This cycle of buying, selling and then reworking can be lengthy for smaller businesses. Many are seeking alternative funding methods that permit them to access working capital without the burden of the PE firm’s management fee.
Private equity firms have been able to fight against stereotypes that paint them as thieves of corporate assets, by highlighting their management skills and demonstrating examples of transformations that have been successful for their portfolio companies. Some critics, including U.S. Senator Elizabeth Warren, argue that private equity’s focus on making rapid profits damages the long-term value and hurts workers.
