Private equity firms invest in businesses that are not publicly listed and work to expand or turn them around. Private equity firms raise money through an investment fund that has a clearly defined structure, distribution waterfall and then invest it into their chosen companies. Investors in the fund are referred to as Limited Partners, and the private equity firm is the General Partner responsible for purchasing, managing, and selling the targets to maximize returns on the fund.
PE firms are often accused of being ruthless and pursuing profits at all price, but they have vast experience in management that allows them to improve the value of portfolio companies by improving operations and other functions. For instance, they could guide new executive teams through the best practices of financial and corporate strategy and assist in implementing streamlined accounting procurement, IT, and processes to cut costs. They also can find operational efficiencies and boost revenues, which is one method to enhance the value of their holdings.
Private equity funds require millions of dollars to invest, and it can take them years to sell a business for a profit. In the end, the industry is highly illiquid.
Private equity firms require previous experience in finance or banking. Associate entry-level associates are mostly responsible for due diligence and finance, whereas senior and junior associates are accountable for the interaction between the firm’s clients and the firm. Compensation for these roles has been on a rising trend in recent years.