A private equity company is an investment firm that raises money to help companies grow by purchasing stakes. This is different than individual investors who invest in publicly traded companies that pay dividends, but doesn’t grant them a direct say in the company’s operations or decisions. Private equity companies invest in groups 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 then purchase it, making adjustments to increase efficiency, cut costs and help the business expand. Private equity firms can make use of debt to buy and take over a business, a process known as leveraged purchases. They then sell the business for a profit and collect management fees from companies that are part of their portfolio.
This cycle of buying, selling and re-building can be a long process for smaller companies. Many companies are looking for alternative funding methods to allow them access to working capital without the management costs of a PE firm added.
Private equity firms have fought back against stereotypes portraying them as strippers, highlighting their management expertise and the success of transformations of portfolio companies. But some critics, including U.S. Senator Elizabeth Warren, argue that the focus of private equity on making quick profits is detrimental to the long-term value and is detrimental to workers.
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