What Is a Private Equity Firm?

A private equity company is an investment company that raises money from investors to buy stakes in companies and assist them to grow. This is different from individual investors who buy stock in publicly traded companies that pay dividends but does not give them direct control over the company’s decisions or operations. Private equity firms invest in groups of companies called portfolios and try to take over the management of these businesses.

They often identify a target business that has room for improvement and then purchase it, making adjustments to increase efficiency, reduce costs and help the company grow. Private equity firms can borrow money to purchase and take over businesses in a process referred to as leveraged buying. They then sell the company for profits and collect management fees from the businesses in their portfolio.

This cycle of buying, selling, and then reworking can be lengthy for smaller companies. Many companies are looking for alternatives to funding options that will allow them access to working capital without having the management costs of an PE firm.

Private equity firms have been able to fight against stereotypes that portray them as thieves of corporate assets, stressing their management expertise and examples of successful transformations of their portfolio companies. Some critics, like U.S. Senator Elizabeth Warren, argue that private equity’s focus on making rapid profits damages the long-term value and causes harm to workers.

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