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What Is a Private Equity Firm?

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A private equity company is an investment company that raises funds to help companies grow by buying stakes. This is different from private investors who buy shares in publicly traded companies, which entitles them to dividends but has no direct influence on the business’s decision-making or operations. Private equity firms invest in groups of companies referred to as portfolios and try to take over the management of these businesses.

They will often find a business that has room for improvement and then purchase it, making adjustments to increase efficiency, cut costs and help the business grow. In some cases private equity firms make use of the use of debt to purchase and take over a company called leveraged buyout. They then sell the company at profit and receive management fees from the companies within this link their portfolio.

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

Private equity firms have fought back against stereotypes of them being strippers, by highlighting their management expertise and successful transformations of portfolio companies. Some critics, like U.S. Senator Elizabeth Warren argues that private equity’s primary goal is quick profits, which destroys long-term goals and damages workers.

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