In its broadest sense, private equity is an investment derived from a nonpublic entity, or private company. These investments differ from those in publicly traded companies that allow investors to purchase shares of stock. Private equity (PE) is much bigger; these investors don’t just invest in stock—they buy entire companies.

In modern private equity, a pool of capital is created from private investors, ranging from university endowments and pension funds to hedge funds, Wall Street investment banks, and high-net-worth individuals. The managers of these private equity pools, or funds, then put that capital to work, generally by purchasing private or public companies, “fixing” them so they generate more revenue, cash, and earnings, and then “flipping” them by selling the improved company to another buyer or taking it public on the equity markets.

Private-equity firms invested $309 billion in U.S.-based companies in 2019, according to the American Investment Council. From 2013 to 2018, the top 10 states in terms of investment were Texas, California, Illinois, New York, Massachusetts, Florida, Pennsylvania, Georgia, Colorado, and Ohio.

Private equity investments aren’t just about buying and selling companies, however. Many private equity firms invest in debt, helping a company salvage itself by loaning it money in exchange for an equity position or another form of return. Some private equity firms target funds at startup companies—these are called venture capital firms, though a diversified private equity management company will often include venture capital activity alongside acquisitions and debt purchases. Venture capital investments are often made in exchange for equity in the private company that the firm hopes will turn into big profits should the startup go public or get sold.

Not everyone is a fan of the private equity industry. Critics of private-equity firms believe these firms are bad for companies and employees in the long ru...