So What Do Private Equity Firms Actually Do?
Inside the World of Buying, Fixing, and Flipping Entire Companies — Quietly and for Billions, There’s a certain mystique around private equity. You’ll hear the term thrown around on finance podcasts, in headlines about billion-dollar deals, or from that one friend who now works at a “fund” and suddenly only drinks $12 cold brew.
But what do private equity firms actually do?
They’re not simply wealthy individuals shifting funds. And they’re not necessarily corporate heroes or corporate villains either. Imagine them more as high-risk, hyper-analytical mechanics — acquiring companies, fiddling with the engine, perhaps repainting it, and then reselling it for a profit greater than what they bought it for.
But neither is it that easy. Because between that buy-and-sell instant there exists a universe of strategy, debt, tension, and — too often — change.
Let’s break it down.
Step One: The Fundraising Hustle
Private equity firms spend months — even years — doing something quietly mundane: raising capital, before a single deal is struck.
They go to institutions with large amounts of money to invest — pension funds, university endowments, insurance companies, family offices, sovereign wealth funds. The investors, who are Limited Partners (LPs), commit money to the firm’s next fund, believing them to secure good deals and achieve good returns.
The PE fund then acts as the General Partner (GP), overseeing that fund of money. For this, they are paid in two principal ways: a management fee and a performance fee (typically 2% and 20%, respectively).
Step Two: Finding the Right Company
(The “Deal Sourcing” Phase)
Then there’s the excitement: the search. Private equity companies search continually for possible acquisitions. They may be underperforming companies, expanding but underfunded businesses, or corporate spin-offs. After a transaction has been proposed, due diligence and negotiation take over.
Step Three: The (Often Debt-Financed) Acquisition
PE companies don’t usually purchase firms with their own funds. They like leveraged buyouts (LBOs), which are similar to buying a home with a mortgage — but for billion-dollar businesses. The firm is purchased with a combination of equity and debt, with the debt on the books of the company.
Step Four: The Transformation Phase
This is where PE firms create value. They may reduce redundant costs, grow what is working, introduce professional management, and streamline operations. This stage is the most intensive and can transform a failing business into a market leader.
Step Five: The Exit — Time to Cash In
All investments have an exit. It might be through IPO, strategic sale, secondary buyout, or dividend recap. The objective is straightforward: sell high and buy low and enhance the asset.
Real Stories That Tell the Tale
- Hilton Hotels (Blackstone): Purchased ahead of the 2008 crash, reworked, and then IPO’d — one of the most profitable ever PE deals.
- Toys “R” Us: Purchased with too much debt, couldn’t keep up with online shopping, went bankrupt.
So, Are These Companies Helping or Hurting?
The answer is not black and white. PE firms can resuscitate companies or kill them, based on how they handle risk and transformation. They are potent instruments — the result is up to how they are applied.
Last Thoughts: Why You Should Care
Even if you don’t work in finance, PE defines the economy you inhabit. From the apps you use to the stores you shop at, private equity is invariably behind the scenes. Learning how it works provides insight into who’s controlling the levers of power in today’s business world.