A private equity company invests in companies to generate profits for investors typically within a period of between four and seven years. The firms find opportunities for investment, conduct extensive studies of the company and the industry, and decide whether the company could be improved. They also attempt to understand the management team and the competitive dynamics of the industry.
They typically purchase the majority or all of the control shares in a business and work closely with the management to rework budgets and operations daily to cut costs or boost performance. They may also assist companies develop new business strategies that may be too radical for cautious public investors.
Managers of private equity firms also get significant tax benefits from the government due to the “carried-interest” loophole. This incentive lets them get high fees regardless of the financial performance of their portfolio companies provided they are able to sell it for a significant profit after retaining the company for a period of three to seven years.
One method to earn large returns is through the acquisition of similar businesses and managing them under a single umbrella in order to benefit from economies of scale. This strategy can put stress on employees as ProPublica found out when it investigated the effects of a private equity firm buying the hospital chain. Nurses were sometimes unable to access basic medical supplies such as IV fluids or sponges and apartment tenants had trouble paying rent.
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