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A private equity firm is an investment firm that raises money from investors to buy stakes in companies and assist them grow. This differs from the individual investors who buy shares in publicly traded companies, which allows them to receive dividends, but has no direct effect on the business’s decision-making or operations. Private equity firms invest in groups of companies referred to as portfolios and seek to take control of these businesses.
They typically identify a company with room for improvement and buy it, making adjustments to increase efficiency, reduce costs and help the company expand. In certain cases private equity firms make use of loans to purchase and take over a business also known as a leveraged buyout. They then sell the company for profits and collect management fees from the companies within their portfolio.
This cycle of buying, selling, and upgrading can be very time-consuming for smaller companies. Many companies are seeking alternative ways to fund their business that give them access to working capital without the management costs of an PE firm.
Private equity firms have fought against stereotypes that paint them as corporate strippers assets, by highlighting their management skills and demonstrating examples of transformations that have been successful for their portfolio companies. Critics, including U.S. Senator Elizabeth Warren argues that private equity’s main focus is on quick profits, which undermines the long-term perspective of workers and undermines their rights.