What Is a Private Equity Firm?

A private equity firm is an investment firm that raises money from investors to buy stakes in companies and assist them grow. This is different from private investors who purchase shares in publicly traded companies, which gives them dividends but does not give them a direct say in the company’s operations or decisions. Private equity firms invest in a group of companies, also known as a portfolio. They typically seek to take over the management of those businesses.

They will often find a company that is in need of improvement and buy it, making changes to improve efficiency, cut costs and help the company grow. In certain cases private equity firms utilize the use of debt to purchase and take over a business also known as leveraged buyout. They then sell the company for a profit and take management fees from the companies in their portfolio.

This cycle of selling, buying, and upgrading can be very time-consuming for smaller businesses. Many companies are reference looking for alternatives to funding options that will allow them access to working capital without having the management fees of a PE company added.

Private equity firms have fought against stereotypes of them being strippers, by highlighting their management skills and the successful transformations of portfolio companies. Some critics, including U.S. Senator Elizabeth Warren argues that private equity’s focus is on quick profits that destroy long-term value and hurts workers.