What Is a Private Equity Firm?
A private equity company is an investment company that raises money from investors to buy stakes in businesses and help them grow. This is different from individual investors who buy stock in publicly traded firms that pay dividends, but does not grant them a direct say in the company’s operations or decisions. Private equity companies invest in groups of companies called portfolios and try to take over the management of these businesses.
They typically purchase an organization that has room for improvement. They then implement changes to improve efficiency, lower costs, and expand the business. Private equity firms can make use of debt to buy and take over a company, a process known as leveraged buying. They then sell the company at a profit and collect management fees from the companies in their portfolio.
This cycle of acquiring, upgrading and selling can be lengthy and costly for businesses particularly small ones. Many companies are searching for alternative funding methods to allow them access to working capital without the management costs of a PE firm added.
Private equity firms have fought against stereotypes that portray them as strippers, highlighting their management expertise and successful transformations of portfolio companies. But critics, like U.S. Senator Elizabeth Warren argues that private equity’s main focus is on quick profits that destroy the long-term perspective of workers and undermines their rights.
