What Is a Private Equity Firm?

A private equity firm is an investment company that raises funds from investors to purchase stakes in companies and help them grow. This is different from private investors who invest in publicly traded companies, which allows them to receive dividends, but has no direct effect on the company’s decisions and operations. Private equity firms invest in a set of companies, called a portfolio, and usually seek to take over the management of these businesses.

They usually identify a company with room for improvement and purchase it, making changes to improve efficiency, reduce costs and allow the business to grow. In certain instances, private equity firms use loans to purchase and take over a business also known as a leveraged buyout. They then sell the business for a profit and pay management fees to companies in their portfolio.

This recurring cycle of buying, enhancing and selling can be time-consuming and costly for companies particularly smaller ones. Many companies are looking for alternative methods of financing that can give them access to working capital without the management costs of the PE company added.

Private equity firms have pushed back against stereotypes that paint them https://partechsf.com/what-you-need-to-know-about-information-technology-by-board-room-discussion/ as squatters of corporate assets, and have emphasized their management expertise and examples of transformations that have been successful for their portfolio companies. But some critics, including U.S. Senator Elizabeth Warren argues that private equity’s main focus is on quick profits, which undermines long-term value and hurts workers.