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Equity Firm

Definition - What does Equity Firm mean?

An equity firm, also known as a private equity firm, uses its own or one of the other investors' capital for its startup and expansion operations. These firms are not publicly listed and do not have shares that are traded in the stock market; hence, they are not subject to many of the regulations that apply to public companies. The investors of equity firms are institutional investors, venture capital companies or high net worth individuals who want to fund the operations of a company for personal or business interest.

Divestopedia explains Equity Firm

A private equity firm includes investment managers and companies that collect funds from wealthy investors for the purpose of investing into new or existing companies. The idea behind such private equity firms is to return a profit to the investors typically within four to seven years. In return for these services, the private equity firm or manager gets a certain fee as well as a certain percentage of the gross profits.

The most common process is for an equity firm to buy a company through auction. The equity firm increases the value of the bought company by way of process improvement, implementation of a growth plan and other strategies. It infuses new technologies, processes and other resources to increase the productivity and operational efficiency of the company. In some cases, it makes negative decisions, such as laying off workers or closing down unprofitable units, with an aim to increase the profitability of the company. Once the ailing company is up and running, the private equity firm exits the investment by selling it off to a strategic buyer or another private equity firm. In other cases, it can exit the investment through an initial public offering.

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