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A private equity firm is an investment company that collects money from investors to buy stakes in companies and aid them expand. This differs from individual investors who purchase shares in publicly traded companies, which allows them to receive dividends, however, it has no direct influence on the company’s decision-making and operations. Private equity firms invest in a set of companies, also known as a portfolio, and generally attempt to take over the management of these businesses.
They usually identify a company that could be improved and buy it, implementing changes to improve efficiency, reduce expenses and help the business grow. In some instances private equity firms utilize borrowing to buy and take over a business called a leveraged buyout. They then sell the company at profit and receive management fees from the companies in their portfolio.
This cycle of buying, enhancing and selling can be lengthy and costly for companies particularly smaller ones. Many companies are searching for alternative ways to fund their business that give them access to working capital without having the management fees of a PE firm.
Private equity firms have pushed back against stereotypes portraying them as strippers of corporate assets, highlighting their management expertise and examples of transformations that have been successful for their portfolio companies. But some critics, including U.S. Senator Elizabeth Warren, argue that private equity’s focus on generating quick profits is detrimental to the long-term value and is detrimental to workers.
