By June 2, 2024

A private equity company is an investment company that raises funds from investors to purchase stakes in companies and help them grow. This is different from private investors who invest in publicly traded companies, which gives them the right to dividends, but has no direct effect on the company’s decisions and operations. Private equity firms invest in a collection of companies, known as a portfolio, and generally seek to take over the management of those businesses.

They will often find a company that could be improved and buy it, implementing adjustments to increase efficiency, cut costs and allow the business to expand. Private equity firms could borrow money to purchase and take over businesses in a process referred to as leveraged purchases. They then sell the company at profit and receive management fees from the companies that are part of their portfolio.

This recurring cycle of buying, improving and selling can be lengthy and costly for companies particularly smaller ones. Many are looking for alternative financing methods that let them access working capital without the added burden of a PE company’s management fees.

Private equity firms have fought back against stereotypes portraying them as strippers, by highlighting their management expertise and the success of transformations of portfolio companies. Critics, including U.S. Senator Elizabeth Warren argues that private equity’s main focus is on quick profits, which damages long-term goals and damages workers.