Private equity firms invest in businesses that are not listed publicly, and then work to expand or turn them around. Private equity firms raise money through an investment fund that has a clearly defined structure, distribution waterfall and then invest it into the companies they want to invest in. The fund’s investors are known as Limited Partners, and the private equity firm is the General Partner responsible for buying and selling the targets to maximize profits on the fund.
PE firms are often criticised for being brutal and pursuing profits at all cost, but they have vast experience in management that allows them to enhance the value of portfolio companies by improving the operations and supporting functions. For instance, they are able to guide new executive teams through the best practices for corporate strategy and financial management and help implement more efficient accounting, procurement, and IT systems to reduce costs. They also can identify ways to improve efficiency and increase revenue, which is a way to increase the value of their possessions.
Unlike stock investments which can be converted quickly into cash Private equity funds typically require a huge sum of money and can take years before they can sell a company they want to purchase at a profit. Because of this, the industry is extremely illiquid.
Private equity firms require previous experience in banking or finance. Associate entry-level associates are principally responsible for due diligence and finance, while junior and senior associates are accountable for the relationship between the firm’s clients and the firm. In recent times, compensation for these positions has increased.
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