A private equity company is an investment firm that raises funds from investors to purchase stakes in businesses and help them to grow. This differs from individual investors who invest in publicly traded companies which pay dividends, but does not grant them direct control over the company’s decisions or operations. Private equity firms invest in a group of companies known as portfolios and attempt to take control of these businesses.
They will often buy reference an organization that has potential for improvement, and implement changes to improve efficiency, cut costs, and grow the company. Private equity firms may utilize debt to purchase and take over businesses this is referred to as leveraged buying. They then sell the business for a profit and collect management fees from companies in their portfolio.
This recurring cycle of purchasing, enhancing and selling can be time-consuming and costly for businesses particularly smaller ones. Many are looking for 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 pushed back against stereotypes portraying them as thieves of corporate assets, by highlighting their management skills and demonstrating examples of transformations that have been successful for their portfolio businesses. Critics, such as U.S. Senator Elizabeth Warren argues that private equity’s primary goal is quick profits, which destroys long-term value and hurts workers.