What Does a Private Equity Firm Do?

A private equity firm invests in businesses to earn an investment profit for investors, typically within the span of four to seven years. The firms identify potential investment opportunities, conduct extensive studies of the company and its industry and determine if the business can be improved. They also try to understand the management team and the competitive environment of the industry.

They often purchase the majority of or control stake in a company and work closely with the management to improve budgets and operations daily in order to reduce costs or boost performance. They can also help businesses develop innovative business strategies that may be too radical for cautious public investors.

Managers of private equity firms receive substantial 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 profitability of their portfolio companies provided they are able to sell it at a substantial profit after retaining the company for three to seven years.

One way they generate high returns is by acquiring similar businesses and operating them under a single umbrella to gain economies of scale. However, this method can also cause stress on employees, as ProPublica discovered when it looked at the effects of a medical chain acquired by private equity firms on its employees. Nurses sometimes had difficulty getting basic supplies, like IV fluids or sponges, and apartment dwellers struggled to pay their rent.

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