A private equity firm buys an ownership stake in a company that is not listed publicly and attempts to turn the company around or grow it. Private equity firms raise money in the form of an investment fund that has a predetermined structure, distribution waterfall and then invest it in their chosen companies. The investors in the fund are referred to as Limited Partners, and the private equity firm serves as the General Partner, responsible for buying, managing, and selling the funds to maximize returns on the fund.
PE firms are often accused of being ruthless in their pursuit of profit They often possess a wealth of management expertise that allows them to boost the value of portfolio companies by implementing operations and other support functions. They could, for example, guide a new executive team by guiding them through the best practices in corporate strategy and financial planning and help implement streamlined accounting, IT and procurement systems to reduce costs. They can also find operational efficiencies and boost revenues, which is one way they can enhance the value of their possessions.
In contrast to stock investments, which can be quickly converted to cash Private equity funds typically require millions of dollars and can take years before they are able sell their target companies at a profit. The sector is, therefore, highly illiquid.
Working for an investment firm that deals in private equity typically requires prior experience in banking or finance. Associate entry-levels focus on due diligence and financing, whereas junior and senior associates concentrate on the relationship between the firm and its clients. Compensation for these positions has been on a rising trend in recent years.