A private equity company is an investment company that collects funds from investors to purchase stakes in companies and help them to grow. This differs from individual investors who purchase shares in publicly traded companies and receive dividends but does not give them direct influence over the company’s operations and decisions. Private equity companies invest in a portfolio of companies, also known as a portfolio. They typically look to take over management of those businesses.
They will often buy an organization that has room to improve, and make changes to improve efficiency, lower expenses, and expand the business. In certain instances private equity firms make use of loans to purchase and take over a company called leveraged buyout. They then sell the company for profit and receive management fees from the companies within their portfolio.
This cycle of selling, buying, and upgrading can be very time-consuming for smaller businesses. Many are seeking alternative funding methods that allow them to access working capital without the added burden of the PE firm’s management fees.
Private equity firms have fought against stereotypes of them being strippers, highlighting their management expertise and the success of transformations of portfolio companies. However, critics, such as U.S. Senator Elizabeth Warren, argue that private equity’s focus on generating rapid profits damages the long-term value and harms workers.