What Does a Private Equity Firm Do?

Posted by Security Vault

A private equity firm invests in companies to turn profits for investors, typically within a period of four to seven years. The firms seek out investment opportunities, do extensive studies of the company and the industry, and determine whether the company’s performance can be improved. They also attempt to understand the management team and the competitive environment of the industry.

They usually buy the majority of or control stake in a company and work closely with management to improve daily operations and budgets in order to reduce costs or increase performance. They can also assist companies implement innovative strategies that aren’t suitable for public investors.

Private equity firm managers also get significant tax benefits from the government as a result of the “carried-interest” loophole. This allows them to earn high amounts of money regardless of the performance of their portfolio companies provided they are able to sell it at a substantial profit after retaining the company for a period of three to seven years.

One way they generate high returns is by buying similar businesses and managing them under a single umbrella in order to benefit from economies of scale. However, this strategy can also cause stress on employees as ProPublica revealed when it looked into the impact of a hospital chain bought by private equity firms on its employees. Nurses sometimes had difficulty getting basic supplies, such as sponges important source or IV fluids, while apartment dwellers struggled to pay their rent.