A private equity company is an investment firm that raises money to help companies grow by purchasing stakes. This differs from individual investors who purchase shares in publicly traded companies which pay dividends, but doesn’t give them any direct control over the company’s operations or decisions. Private equity firms invest in a group of companies, also known as a portfolio, and generally look to take over management of those businesses.
They usually purchase a company that has potential for improvement, and implement changes to improve efficiency, cut expenses, and expand the business. Private equity firms might make use of debt to buy and take over a company, a process known as leveraged purchases. They then sell the company for profits and collect management fees from the companies that are part of their portfolio.
This cycle of buying, selling and upgrading can be very time-consuming for smaller companies. Many companies are looking for alternative methods of financing that can give them access to working capital without the management costs of a PE company added.
Private equity firms have fought against stereotypes of them being strippers, highlighting their management skills and the successful transformations of portfolio companies. Some critics, including U.S. Senator Elizabeth Warren, argue that private equity’s focus on making quick profits erodes the value of the company and harms workers.