What Is a Private Equity Firm?

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Private equity firms are an investment firm that raises money from investors to buy stakes in businesses and help them grow. This differs from individual investors who invest in publicly traded companies. This entitles them to dividends but has no direct influence on the company’s decision-making process and operations. Private equity companies invest in a portfolio of companies, also known as a portfolio. They typically seek to take over the management of those businesses.

They usually identify a company that is in need of improvement and then purchase it, making adjustments to increase efficiency, cut expenses and help the business grow. Private equity firms might make use of debt to buy and take over a business which is known as leveraged buying. They then sell the company at an profit and collect management fees from the companies that are part of their portfolio.

This cycle of buying, enhancing and selling can be time-consuming and costly for businesses particularly small ones. Many companies are seeking alternative methods of financing that can give them access to working capital without the management fees of a PE firm.

Private equity firms have fought against stereotypes portraying them as strippers, highlighting their management expertise and the success of transformations of portfolio companies. Critics, such as U.S. Senator Elizabeth Warren, argue that private equity’s obsession with making quick profits destroys long-term value and is detrimental to workers.