A private equity company is an investment company that seeks funds from investors to purchase stakes in companies and assist them to grow. This differs from individual investors who buy stock in publicly traded companies and receive dividends but does not give them direct control over the company’s decisions or operations. Private equity firms invest in a group of companies, referred to as portfolios, and seek to take control of these businesses.
They will often find a company with room for improvement and then purchase it, making adjustments to increase efficiency, reduce costs and help the business grow. In certain instances private equity firms make use of borrowing to buy and take over a business called a leveraged buyout. They then sell the company at profits and collect management fees from the companies within their portfolio.
This cycle of buying, improving and selling can be a time-consuming and costly for companies particularly small ones. Many companies are searching for alternatives to funding options that will allow them access to working capital without having the management costs of the PE firm added.
Private equity firms have pushed back against stereotypes that paint them as corporate strippers assets, stressing their management skills and demonstrating examples of transformations that have been successful for their portfolio companies. Critics, such as U.S. Senator Elizabeth Warren argues that private equity’s focus is on quick profits, which undermines long-term values and harms workers.
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