What Does a Private Equity Firm Do?

Private equity firms invest in companies with the goal of making a profit, usually within four or seven years. The firms look for opportunities to invest, conduct thorough analysis of the company as well as the industry, and determine whether the company could be improved. They also want to know about the management team and the competitive environment of the industry.

They usually buy the majority or the majority of the shares in a business and collaborate closely with management to redesign day-today operations and budgets to cut costs or improve performance. They can also help a company pursue innovative business strategies that might be too radical for cautious public investors.

Managers of private equity firms receive significant tax benefits from the government because of the “carried-interest” loophole. This incentive lets them get high fees regardless of the performance of their portfolio companies so long as they can sell it for a significant profit after holding the business for a period of three to seven years.

One way to generate large returns is through the acquisition of similar businesses and managing them under a single umbrella in order to benefit from economies of scale. This approach can create stress on employees as ProPublica found out when it examined the impact of a private equity company purchasing the hospital chain. Nurses were sometimes unable to access basic medical supplies such as IV fluids or sponges and apartment dwellers had difficulty paying rent.

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