What Is a Private Equity Firm?

A private equity company is an investment company that raises money from investors to buy stakes in companies and assist them to grow. This is different than individual investors who invest in publicly traded firms, which gives them dividends, but doesn’t grant them direct control over the company’s operations and decisions. Private equity companies invest in groups of companies referred to as portfolios and are looking to control of these businesses.

They typically purchase an organization that has potential to improve, and make changes to increase efficiency, reduce costs, and increase the business. In certain instances, private equity firms use loans to purchase and take over a business also known as leveraged buyout. They then sell the company for an profit and collect management fees from the businesses in their portfolio.

This cycle of buying, selling and improving can be 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 firm’s management fee.

Private equity firms have fought back against stereotypes portraying them as strippers, by highlighting their management skills and the successful transformations of portfolio companies. But critics, like U.S. Senator Elizabeth Warren, argue that private equity’s obsession with making rapid profits damages the long-term value and is detrimental to workers.