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A private equity company is an investment company which raises money to help companies grow by buying stakes. This differs from the individual investors who purchase shares in publicly traded companies, which allows them to receive dividends, however, it has no direct influence on the company’s decision-making and operations. Private equity firms invest in a collection of companies, called a portfolio. They typically seek to take over the management of those businesses.
They will often buy a company that has room to improve, and make changes to increase efficiency, reduce costs, and increase the business. Private equity firms could use debt to buy and take over businesses which is known as a leveraged purchase. They then sell the company for a profit and pay management fees to companies 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 let them access working capital without the added burden of a PE firm’s management fee.
Private equity firms have fought back against stereotypes that portray them as strippers, by highlighting their management expertise and successful transformations of portfolio companies. However, critics, such as U.S. Senator Elizabeth Warren, argue that the focus of private equity on making quick profits destroys long-term value and is detrimental to workers.