A private equity firm is an investment company that seeks funds from investors to purchase stakes in companies and assist them grow. This is different from private investors who purchase stock in publicly traded companies, which gives them the right to dividends, but has no direct impact on the company’s decisions and operations. Private equity firms invest in a set of companies, known as a portfolio, and usually seek to take over the management of those businesses.
They typically purchase an organization that has potential for improvement, and implement changes to improve efficiency, cut costs, and grow the company. In some cases private equity firms utilize loans to purchase and take over a business called a leveraged buyout. They then sell the company for a profit and take management fees from the companies in their portfolio.
This recurring cycle of buying, improving and selling can be time-consuming and costly for companies especially small ones. Many are seeking alternative funding methods that allow them to access working capital without the added burden of a PE company’s management fees.
Private equity firms have been able to fight against stereotypes that paint them as strippers of corporate assets, by highlighting their management skills and demonstrating examples of successful transformations of their portfolio companies. But critics, like U.S. Senator Elizabeth Warren argues that private equity’s focus is on quick profits, which undermines long-term values and harms workers.
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