A private equity firm is an investment firm that raises money from investors to buy stakes in companies and aid them to grow. This differs from individual investors who purchase shares in publicly traded companies, which gives them the right to dividends, however, it has no direct influence on the business’s decision-making or operations. Private equity firms invest in a group of companies, referred to as a portfolio, and usually seek to take over the management of those businesses.
They often purchase an organization that has room for improvement, and make adjustments to increase efficiency, reduce costs, and grow the company. Private equity firms can use debt to buy and take over businesses this is referred to as leveraged buying. They then sell the company at profit and receive management fees from the companies in their portfolio.
This cycle of selling, buying, and then reworking can be lengthy for smaller businesses. Many are looking for alternative financing methods that allow them to access working capital without the added burden of the PE firm’s management costs.
Private equity firms have pushed back against stereotypes that portray them as corporate strippers assets, by highlighting their management skills and demonstrating examples of successful transformations of their portfolio companies. Critics, including U.S. Senator Elizabeth Warren, argue that private equity’s focus on making quick profits is detrimental to the long-term value and hurts workers.
