What Is a Private Equity Firm?

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A private equity company is an investment firm that invests in helping companies grow by purchasing stakes. This is different from private investors who buy shares in publicly traded companies. This allows them to receive dividends, but has no direct effect on the company’s decision-making and operations. Private equity companies invest in groups of companies referred to as portfolios and seek to take control of these businesses.

They often purchase an enterprise that has potential for improvement. They then make changes to improve efficiency, decrease expenses, and expand the company. Private equity firms can borrow money to purchase and take over a company this is referred to as leveraged buying. They then sell the business at a profit, and receive management fees from businesses in their portfolio.

This recurring cycle of acquiring, upgrading and selling can be time-consuming 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 the PE company’s management fees.

Private equity firms have fought against stereotypes that paint them as thieves of corporate assets, and have emphasized their management expertise and examples of transformations that have been successful for their portfolio companies. Critics, such as U.S. Senator Elizabeth Warren argues that private equity’s main focus is on quick profits, which damages the long-term perspective of workers and undermines their rights.

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