Private equity firms invest in companies that aren’t publicly traded and then attempt to expand or transform them. Private equity firms raise funds in the form of an investment fund with a specific structure, distribution waterfall, and then invest it into their chosen companies. Fund investors are referred to as Limited Partners, and the private equity company is the General Partner, responsible for buying, managing, and selling the targets to maximize returns on the fund.
PE firms are often critiqued for being uncompromising and pursuing profits at all price, but they have vast experience in management that allows them to improve the value of portfolio companies through improving operations and other functions. They could, for example assist a new executive team by providing the best practices for financial and corporate strategy and assist in the implementation of streamlined IT, accounting and procurement systems to reduce costs. They also can identify operational efficiencies and boost revenue, which is one way to improve the value of their investments.
Private equity funds require millions of dollars to invest, and it can take them years to sell a company in a profit. The industry is therefore highly illiquid.
Working at a private equity company typically requires prior experience in finance or banking. Associate entry-level associates are mostly responsible for due diligence and financials, while senior and junior associates are accountable for the interaction between the firm’s clients and the company. In recent years, compensation for these roles has increased.