What Is a Private Equity Firm?

A private equity company is an investment firm that invests in helping companies grow by buying stakes. This is different from private investors who purchase shares in publicly traded companies, which can be a source of dividends but has no direct impact on the business’s decision-making or operations. Private equity firms invest in groups of companies, referred to as portfolios, and seek to take control of these businesses.

They will often buy an enterprise that has potential for improvement. They then make adjustments to increase efficiency, reduce costs, and grow the business. In certain cases private equity firms make use of the use of debt to purchase and take over a company also known as a leveraged buyout. They then sell the company at a profit, and pay management fees to companies in their portfolio.

This cycle of buying, improving and selling can become time-consuming and costly for companies particularly smaller ones. Many companies are looking for alternative ways to fund their business that give them access to working capital without having the management fees of an PE firm.

Private equity firms have fought against stereotypes of them being strippers, by highlighting their management expertise as well as the successful transformations of portfolio companies. Some critics, including U.S. Senator Elizabeth Warren, argue that private equity’s obsession with making quick profits erodes the value of the company and harms workers.