As outlined by the Investopedia video tutorial, a private equity firm’s sole reason for existence is to profit from the temporary ownership, management, and resale of other businesses. Private equity firms specifically purchase smaller and or struggling businesses. The private equity firm will raise money to buy these companies from investors, banks, and other sources.
Once under the new ownership, improvements are made to the business processes of the purchased companies to increase the purchased company’s overall market worth.
Changes can include replacing or removing the management teams, changing the product line offerings, or reworking the manufacturing processes themselves.
During this time, the private equity firm is eligible to receive a portion of the improved companies’ sales and receive ongoing management fees to improve the company’s processes. It may receive commissions based on how much capital the private equity firm initially raised. After a few years, the private equity firm sells the purchased and improved companies with an eye on making even more profit.
Private equity firms specialize in repeating this process as often as necessary to remain profitable themselves.
