A private equity firm acquires a stake in a business which is not listed on the stock exchange and then works to turn the company around or increase its size. Private equity firms typically raise funds through an investment fund with a defined structure and distribution funnel and then invest the funds into the companies they want to invest in. Limited Partners are the investors in the fund, and the private equity firm is the General Partner responsible for buying or selling the fund and overseeing the targets.
PE firms can be criticized for being ruthless and pursuing profits at every cost, but they have vast experience in management that allows them to improve the value of portfolio companies through improving operations and supporting functions. They can, for example, guide a new executive team through the best practices in financial strategy and corporate strategy and assist in the implementation of more efficient IT, accounting, and procurement systems to reduce costs. They can also increase revenue and find operational efficiencies, which can help them increase the value of their assets.
In contrast to stock investments, which are able to be converted quickly into cash, private equity funds usually require a large sum of money and may take a long time before they can sell a target company at an income. This is why the industry is highly illiquid.
Private equity firms require previous experience in finance or banking. Associate entry-levels are primarily responsible for due diligence and finance, whereas junior and senior associates are responsible for the relationships between the firm’s clients and the firm. Compensation for these roles has been on an upward trend in recent years.