What Is a Private Equity Firm?

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A private equity company is an investment firm that raises money from investors to buy stakes in companies and help them grow. This differs from individual investors who invest in publicly traded companies. This entitles them to dividends but has no direct influence on the company’s decision-making process and operations. Private equity companies invest in groups of companies referred to as portfolios and try 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 costs and help the business grow. In certain instances private equity firms utilize loans to purchase and take over a company also known as leveraged buyout. They then sell the company for a profit and collect management fees from the companies within their portfolio.

This cycle of selling, buying, and then reworking can be lengthy for smaller businesses. Many companies are looking for alternative methods of financing that can give them access to working capital without the management costs of the PE company added.

Private equity firms have been able to fight against stereotypes that paint them as squatters of corporate assets, by highlighting their management expertise and examples of successful transformations of their portfolio businesses. 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 hurts workers.

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