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What Is a Private Equity Firm? – ProPublica

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Private equity is seemingly inescapable. From housing to hospitals and fisheries to fast food, equity investors have acquired a host of businesses in recent decades. Private equity firms control more than $6 trillion in assets in the U.S. But what makes them different from any other type of investor putting their money into a business?

Private equity investors — typified by firms like Bain Capital, Apollo Global Management, TPG, KKR and Blackstone — are different from venture capitalists, who provide a cash infusion to small startups and hope they blossom into the next Facebook. Nor are they stock traders making split-second decisions to buy or sell shares in public companies. Rather, private equity funds aim to take control of a business for a relatively short time, restructure it and resell the company at a profit.

But as ProPublica and many others have shown, the ways in which private equity goes about this restructuring can raise a number of concerns, over such things as layoffs and furloughs for employees and degraded services for customers. Critics also worry that private equity firms weigh down acquired companies with substantial debt from the money borrowed to finance the purchase.

What Is Private Equity?

Private equity funds are pooled investments that are generally not open to small investors. Private equity firms invest the money they collect on behalf of the fund’s investors, usually by taking controlling stakes in companies. The private equity firm then works with company executives to make the businesses — called portfolio companies — more valuable so they can sell them later at a profit.

This is different from, say, an individual investor buying a share of Amazon stock for $135. Purchasing that share gives you an infinitesimal stake in the company and entitles you to any dividend the company may pay out, but your ownership stake isn’t large enough to affect the company’s decision-making and operations. Private equity funds, by contrast, are not publicly traded securities, and the amount they invest usually involves trying to take a controlling stake in companies.

Private equity funds are generally backed by investments from large institutional investors: pension funds, sovereign wealth funds, endowments and very wealthy individuals. Private equity firms manage these funds, using both investors’ contributions and borrowed money.

Like any business, private equity firms want to make money, generating returns for their investors. Fund managers typically spend time conducting extensive research on both companies and industries — …….


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