A private equity company takes an ownership stake in a company which is not listed on the stock exchange and then is able to turn the business around or increase its size. Private equity firms typically raise funds in the form of an investment fund that has a clearly defined structure and distribution system, and then they invest that capital into their target companies. Fund investors are known as Limited Partners, and the private equity firm is the General Partner responsible for buying, managing, and selling the targets to maximize profits on the fund.
PE firms are sometimes critiqued for being uncompromising in their pursuit of profit, but they often have a vast management experience that allows them to boost the value of portfolio companies by implementing operations and other support functions. They could, for example assist a new executive team by providing the best practices for financial strategy and corporate strategy and assist in implementing streamlined accounting, IT, and procurement systems to cut costs. They can also identify ways to improve efficiency and increase revenue, which is one way they can increase the value of their holdings.
Contrary to stock investments that can be converted quickly into cash, private equity funds usually require a large sum of money and can take years before they are able sell their target companies at an income. As a result, the business is highly inliquid.
Working at a private equity firm typically requires prior experience in finance or banking. Associate entry-levels focus on due diligence and financing, whereas senior and junior associates focus on the relationship between the firm and its clients. Compensation for these roles has been on a rising trend in recent years.