A private equity company is an investment firm that raises money from investors to buy stakes in businesses and help them to grow. This is different than individual investors who invest in publicly traded firms which pay dividends, but doesn’t grant them direct influence over the company’s decisions and operations. Private equity firms invest in a group of companies, called a portfolio, and usually attempt to take over the management of those businesses.
They typically identify a business that has room for improvement and then purchase it, making adjustments to increase efficiency, reduce costs and allow the business to grow. In certain cases private equity firms utilize loans to purchase and take over a business called a leveraged buyout. They then sell the company at an profit and collect management fees from the companies in their portfolio.
This cycle of buying, selling, and then reworking can be lengthy for smaller companies. Many companies are searching for alternative ways to fund their business that give them access to working capital without important source the management costs of a PE firm added.
Private equity firms have fought back against stereotypes of them being strippers, highlighting their management skills and the successful transformations of portfolio companies. But some critics, including U.S. Senator Elizabeth Warren, argue that private equity’s obsession with making quick profits destroys long-term value and harms workers.