What Is a Private Equity Firm?

Private equity firms are an investment company that raises funds from investors to purchase stakes in companies and help them to grow. This is different than individual investors who invest in publicly traded firms which pay dividends, but doesn’t give them direct influence over the company’s decisions and operations. Private equity firms invest in a group of companies, referred to as portfolios, and attempt to take control of these businesses.

They often identify a target company that could be improved and buy it, making adjustments to increase efficiency, cut costs and allow the business to expand. In certain instances private equity firms make use of the use of debt to purchase and take over a business called a leveraged buyout. They then sell the business at a profit, and collect management fees from companies in their portfolio.

This cycle of purchasing, enhancing and selling can be time-consuming and costly for companies particularly small ones. Many companies are looking for alternative methods of financing that can give them access to working capital without having the management costs of a PE firm.

Private equity firms have been able to fight against stereotypes portraying them as strippers of corporate assets, stressing their click reference management skills and demonstrating examples of successful transformations of their portfolio companies. Some critics, like U.S. Senator Elizabeth Warren, argue that the focus of private equity on making quick profits destroys long-term value and harms workers.