A private equity firm buys an ownership stake in a company that isn’t listed publicly and attempts to turn the company around or to grow it. Private equity firms raise funds through an investment fund that has a clearly defined structure, distribution waterfall and then invest it into the companies they want to invest in. Investors in the fund are referred to as Limited Partners, and the private equity firm serves as the General Partner responsible for buying and selling the targets to maximize profits on the fund.
PE firms are often criticised for being brutal and pursuing profits at all price, but they have vast experience in management that allows them to boost the value of portfolio companies through improving operations and supporting functions. They can, for instance assist a new executive team through the best practices in financial and corporate strategy and assist in implementing streamlined accounting, IT and procurement systems to cut costs. They also can identify operational efficiencies and boost revenue, which is a method to increase the value of their investments.
Contrary to stock investments that can be converted in a matter of minutes to cash Private equity funds typically require a large sum of money and may take a long time before they are able to sell their target companies at a profit. This is why the industry is extremely illiquid.
Working at a private equity company typically requires previous experience in banking or finance. Entry-level associates work primarily on due diligence and financing, while junior and senior associates are focused on the relationship between the firm and its clients. In recent years, compensation for these roles has risen.
