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A private equity firm invests in companies to turn profits for investors, typically within the span of four to seven years. The firms seek out investment opportunities, do extensive analysis of the company as well as the industry, and determine whether the business can be improved. They also need to know the management team of the company and its competitive dynamics.

They typically purchase the majority or all of the interest in a business and collaborate closely with management to overhaul day-to-day budgets and operations to cut costs or improve performance. They can also help businesses develop new strategies that aren’t suitable for investors in the public sector.

Managers of private equity firms get significant tax benefits from the federal government thanks to the “carried-interest” loophole. This incentive allows them to earn high fees regardless of the financial performance of their portfolio companies, in the event that they can sell it for a significant profit after holding the business for a period of three to seven years.

One method they can generate high returns is by acquiring similar businesses and operating them under one umbrella to benefit from economies of scale. However, this approach can also cause stress on employees, as ProPublica revealed when it looked into the effects of a healthcare chain purchased by private equity firms on its employees. Nurses sometimes were unable to access basic medical supplies such as IV fluids and sponges, and apartment dwellers had difficulty making rent payments.