A private equity firm acquires an interest in a company which is not listed on the stock exchange and then works to turn the company around or to grow it. Private equity firms typically raise funds in the form of an investment fund with a clearly defined structure and distribution waterfall, and then they invest the funds into the companies they want to invest in. Investors in the fund are referred to as Limited Partners, and the private equity firm is the General Partner responsible for buying, managing, and selling the target companies to maximize the returns on the fund.
PE firms are sometimes critiqued for being uncompromising in their pursuit of profit However, they typically have a vast management experience that allows them to increase the value of portfolio companies through operations and other support functions. They can, for instance assist a new executive team by providing the best practices for corporate strategy and financial planning and assist in implementing streamlined accounting, IT and procurement systems to lower costs. They also can find ways to improve efficiency and increase revenue, which is one way to improve the value of their investments.
In contrast to stock investments, which can be converted quickly into cash, private equity funds usually require millions of dollars and could take years before they are able to sell their target companies at an income. The industry is therefore highly liquid.
Working for a private equity firm typically requires previous experience in finance or banking. Entry-level associates work primarily on due diligence and financing, while junior and senior associates focus on the relationship between the firm and its clients. In recent years, compensation for these roles has increased.
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