What Is a Private Equity Firm?

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Private equity firms are an investment company that raises money from investors to buy stakes in companies and help them expand. This is different from individual investors who purchase shares in publicly traded companies. This gives them the right to dividends, however, it has no direct influence on the company’s decision-making and operations. Private equity companies invest in groups of companies known as portfolios and try to take over the management of these businesses.

They will often find a business that has room for improvement and buy it, making changes to improve efficiency, cut costs and help the business expand. Private equity firms could use debt to buy and take over a business this is referred to as a leveraged purchase. They then sell the company for an profit and collect management fees from the companies in their portfolio.

This cycle of buying, selling, and upgrading can be very time-consuming for smaller businesses. Many are looking for alternative funding methods that permit them to access working capital without the burden of a PE company’s management fees.

Private equity firms have pushed back against stereotypes that portray them as corporate strippers assets, highlighting their management skills and demonstrating examples of successful transformations of their portfolio businesses. 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 hurts workers.

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