What Is a Private Equity Firm?
A private equity company is an investment firm which raises money to help companies grow by buying stakes. This differs from individual investors who invest in publicly traded companies and receive dividends but does not give them direct influence over the company’s decisions and operations. Private equity firms invest in a group of companies known as portfolios and attempt to take control of these businesses.
They will often find a company that could be improved and buy it, implementing changes to improve efficiency, reduce costs and allow the business to expand. In some cases, private equity firms use borrowing to buy and take over a business, known as leveraged buyout. They then sell the company at a profit, and take management fees from the companies in their portfolio.
This cycle of buying, selling and re-building can be a long process for smaller companies. Many are seeking alternative funding methods that let them access working capital without the burden of the PE firm’s management fee.
Private equity firms have fought against stereotypes portraying them as strippers, by highlighting their management expertise and successful transformations of portfolio companies. But critics, including U.S. Senator Elizabeth Warren argues that private equity’s main focus is on quick profits, which destroys long-term values and harms workers.