What Is a Private Equity Firm?

A private equity company is an investment firm that invests in helping companies grow by purchasing stakes. This differs from individual investors who invest in publicly traded firms which pay dividends, but doesn’t grant them direct influence over 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 usually purchase the company with potential for improvement, and make changes to improve efficiency, reduce expenses, and expand the company. Private equity firms might use debt to buy and then take over a business this is referred to as leveraged buying. They then sell the company at profit and receive management fees from the companies within their portfolio.

This cycle of buying, selling and re-building can be a long process for smaller companies. Many are looking for alternative funding methods that permit them to access working capital without the burden of the PE firm’s management fees.

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

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