What Is a Private Equity Firm?


A private equity company is an investment company that seeks money from investors to buy stakes in companies and assist them grow. This is different from individual investors who buy stock in publicly traded companies which pay dividends, but doesn’t give them direct influence over the company’s decisions or operations. Private equity firms invest in groups of companies called portfolios and attempt to take control of these businesses.

They usually purchase an organization that has room for improvement, and implement changes to improve efficiency, reduce costs, and grow the company. Private equity firms may use debt to buy and take over businesses which is known as leveraged purchases. They then sell the company at a profit and collect management fees from the businesses in their portfolio.

This cycle of selling, buying, and re-building can be a long process for smaller businesses. Many companies are looking for alternative methods of financing that can give them access to working capital without the management fees of a PE firm added.

Private equity firms have fought back against stereotypes that paint them as squatters of corporate assets, and have emphasized their management skills and demonstrating examples of transformations that have been successful for their portfolio companies. Critics, such as U.S. Senator Elizabeth Warren, argue that private equity’s focus on generating quick profits erodes the value of the company and hurts workers.

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