A private equity company is an investment company that raises money to help companies grow by purchasing stakes. This is different from private investors who purchase shares in publicly traded companies, which entitles them to dividends but has no direct effect on the company’s decision-making and operations. Private equity firms invest in a group of companies, known as a portfolio, and usually attempt to take over the management of these businesses.
They usually purchase a company that has potential to improve, and make changes to increase efficiency, lower costs, and grow the company. Private equity firms might make use of debt to buy and then take over a business, a process known as leveraged purchases. They then sell the business at a profit, and collect management fees from companies in their portfolio.
This recurring cycle of purchasing, enhancing and selling can be a time-consuming and costly for businesses, especially smaller ones. Many companies are looking for alternatives to funding options that will allow them access to working capital without having the management fees of the PE company added.
Private equity firms have pushed back against stereotypes portraying them as strippers of corporate assets, by highlighting their management skills and demonstrating examples of successful transformations of their portfolio companies. Some critics, like U.S. Senator Elizabeth Warren argues that private equity’s focus is on quick profits that destroy long-term values and harms workers.
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