Private equity firms invest in businesses with the intention of generating profits, typically within four or seven years. The firms seek out opportunities for investment, conduct extensive studies of the company and the industry, and then determine whether the company could be improved. They also need to know the company’s management team and its competitive environment.

They typically purchase the majority of or control part of a company, and work closely with the management to revamp budgets and operations daily in order to lower costs or increase performance. They may also assist a company pursue innovative business strategies that are too radical for wary public investors.

Managers of private equity firms get significant tax benefits from the government as a result of the „carried-interest” loophole. This incentive has allowed them to collect large fees regardless of whether the portfolio businesses are profitable, so long as they are able to sell the company at an impressive profit after having held it for a period of between three and seven years.

They can reap huge returns by purchasing similar businesses and putting them under one umbrella to benefit from economies of scale. This can put pressure on employees, as ProPublica found out when it studied the effects of a private equity firm buying a hospital chain. Nurses could not always access basic medical supplies such as IV fluids or sponges and apartment dwellers had difficulty paying rent.