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What Is a Private Equity Firm?

A private equity firm is an investment company that raises money from investors to buy stakes in companies and aid them expand. This differs from individual investors who purchase shares in publicly traded companies that pay dividends, but does not grant them a direct say in the company’s operations or decisions. Private equity firms invest in a group of companies referred to as portfolios and are looking to control of these businesses.

They will often buy a company that has potential for improvement, and make adjustments to increase efficiency, reduce costs, and grow the company. In some cases private equity firms make use of debt to purchase and take over a company which is referred to as leveraged buyout. They then sell the company for profits and collect management fees from the companies in their portfolio.

This recurring cycle of purchasing, enhancing and selling can be a time-consuming and costly for companies particularly smaller ones. Many are seeking alternative funding methods that permit them to access working capital without the burden of a PE firm’s management fees.

Private equity firms have fought back against stereotypes of them being strippers, highlighting their management expertise and successful transformations of portfolio companies. However, critics, such as U.S. Senator Elizabeth Warren argues that private equity’s primary goal is quick profits, which damages the long-term perspective of workers and undermines their rights.

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