Private equity firms invest in businesses that aren’t publicly traded, and then work to next expand or turn them around. Private equity firms raise money in the form an investment fund with a defined structure, distribution waterfall, and then invest it in their target companies. The fund’s investors are known as Limited Partners, and the private equity firm serves as the General Partner, responsible for buying and selling the funds to maximize returns on the fund.
PE firms are often criticised for being ruthless in their pursuit of profits, but they often have a vast management experience which allows them to enhance the value of portfolio companies by implementing operations and other support functions. They could, for example guide a newly appointed executive team through the best practices in financial and corporate strategy and assist in the implementation of streamlined IT, accounting and procurement systems to cut costs. They can also boost revenue and improve operational efficiency which will help them improve the value of their assets.
Private equity funds require millions of dollars to invest and it can take years to sell a company with a profit. The industry is therefore highly illiquid.
Working at a private equity firm usually requires previous experience in banking or finance. Associate entry-level associates are mostly responsible for due diligence and finance, whereas senior and junior associates are accountable for the relationship between the clients of the firm and the firm. Compensation for these positions has been on an upward trend in recent years.