A private equity firm buys an interest in a company that is not publicly listed and then attempts to turn the company around or grow it. Private equity firms raise capital by way of an investment fund with a defined structure, distribution waterfall and then invest it in their chosen companies. The fund’s investors are known as Limited Partners, and the private equity firm is the General Partner responsible for purchasing, managing, and selling the targets to maximize profits on the fund.
PE firms can be critiqued for being uncompromising and seeking profits at all cost, but they possess extensive management experience that enables them to improve the value of portfolio companies by enhancing operations and supporting functions. They could, for example, guide a new executive team by providing the best practices for financial and corporate strategy and assist in implementing streamlined accounting, IT and procurement systems that reduce costs. They also can find operational efficiencies and boost revenue, which is a method to increase the value of their investments.
Contrary to stock investments that can be quickly converted to cash, private equity funds usually require a huge sum of money and could take years before they are able to sell a company they want to purchase at a profit. As a result, the market is extremely inliquid.
Working for a private equity firm typically requires previous experience in finance or banking. Associate associates at entry-level work mostly on due diligence and financing, whereas junior and senior associates focus on the relationship between the firm and its clients. Compensation for these roles has been on a rising trend in recent years.