What Is a Private Equity Firm?

A private equity company is an investment company that invests in helping companies grow by buying stakes. This differs from individual investors who invest in publicly traded firms, which gives them dividends, but doesn’t grant them any direct control over the company’s operations or decisions. Private equity firms invest in groups of companies known as portfolios and attempt to take control of these businesses.

They often purchase an organization that has room for improvement. They then make adjustments to increase efficiency, decrease costs, and expand the company. Private equity firms could utilize debt to purchase and take over a business, a process known as a leveraged purchase. They then sell the company at a profit, and take management fees from the companies in their portfolio.

This cycle of purchasing, enhancing and selling can be time-consuming and costly for businesses particularly small ones. Many are looking for alternative funding methods that allow them to access working capital without the added burden of a PE firm’s management fee.

Private equity firms have fought back against stereotypes portraying them as strippers, highlighting their management expertise and the success of transformations of portfolio companies. Some critics, like U.S. Senator Elizabeth Warren argues that private equity’s goal is to make quick profits, which destroys long-term values and harms workers.

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