system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: how does private equity work?

I understand private equity is just a group of people buying a company, but oftentimes the debt to purchase the company is put on the company itself.  How does this work and why is this possible?

How can you take out a loan to buy something and make that same thing pay it back? 

&#x200B;

If private equity often signals the death of a company anyways, why sell yourself to private equity firms?
gpt
Lots and lots and lots of misinformation in here. The basic idea is this: private equity simply refers to firms that invest in private companies (i.e., not public). The goal of private equity funds is to purchase a company, make it more valuable, and then sell it at a later date to another buyer (like another PE firm or strategic corporate buyer) for a profit. In purchasing a company, most often PE firms will use debt to fund some of the purchase price (leveraged buyout or LBO). Think of it like a mortgage, but instead of an individual buying a house a PE firm gets to buy a business. If they put too much debt on the business and the business starts to do poorly, they might not be able to make their interest payments and default on that debt. That’s a really bad thing for all parties involved, including the PE firm. The PE firm owns the equity of the business, which is subordinated to the debt. So if the debt holders can’t be made whole, the equity holders lose all of their money. The way PE firms make money is to grow the business and sell at a higher price than they bought (while paying down debt and building equity like you would do in a house). 

A bunch of people posting here only know what they read in the news about situations like Toys-R-Us and the like, but the truth is that in the vast majority of PE investments they want to make the business grow and be more valuable for the next owner. Bankruptcies and liquidations are not good for equity holders.