A private equity firm acquires an ownership stake in a company that is not listed publicly and then seeks to turn the company around or increase its size. Private equity firms raise funds in the form of an investment fund with a specific structure, distribution waterfall and then invest it into their target companies. Fund investors are known as Limited Partners, and the private equity firm is the General Partner responsible for purchasing and selling the targets to maximize returns on the fund.
PE firms are often critiqued for being uncompromising and pursuing profits at all cost, but they possess extensive management experience that allows them to enhance the value of portfolio companies through improving the operations and supporting functions. They can, for instance help guide a new executive team through the best practices in corporate strategy and financial planning and assist in the implementation of streamlined accounting, IT and procurement systems to lower costs. They can also increase revenues and discover operational efficiencies that 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 typically require millions of dollars and may take years before they are able sell a target company at a profit. This is why the industry is highly illiquid.
Private equity firms require prior experience in banking or finance. Associate entry-level associates are responsible for due diligence and finance, while junior and senior associates are responsible for the relationship between the clients of the firm and the firm. Compensation for these roles has been on an upward trend in recent years.