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Private equity firms are an investment company that raises money from investors to buy stakes in companies and help them grow. This is different from individual investors who purchase shares in publicly traded companies. This can be a source of dividends but has no direct impact on the business’s decision-making or operations. Private equity firms invest in a group of companies referred to as portfolios and attempt to take control of these businesses.
They will often buy the company with room for improvement, and implement changes to improve efficiency, decrease expenses, and expand the business. In certain instances private equity firms make use of loans to purchase and take over a business, known as a leveraged buyout. They then sell the business for a profit and take management fees from the companies that are part of their portfolio.
This cycle of buying, selling and re-building can be a long process for smaller businesses. Many companies are searching for alternative ways to fund their business that give them access to working capital without the management costs of an PE firm added.
Private equity firms have fought back against stereotypes that portray them as corporate strippers assets, by highlighting their management skills and demonstrating examples of successful transformations of their portfolio businesses. But critics, like U.S. Senator Elizabeth Warren argues that private equity’s focus is on quick profits, which damages long-term goals and damages workers.