Elizabeth Warren’s favorite image for businesses is that they “suck” profits out of American society like vampires. Her latest targets are private-equity firms that invest in struggling companies, often replace management and bet on a turnaround. She wants to put them out of business.

“The Stop Wall Street Looting Act,” as Ms. Warren calls her new bill, would impose new taxes, legal liabilities and regulations that would make it more costly and risky for investors to try to revive businesses. It would also effectively rewrite the bankruptcy code.

Ms. Warren describes private equity as “bleeding the company dry and walking away enriched even as the company succumbs.” Perhaps she’s trying to appeal to “Twilight” and “Buffy” loving millennials. But her garlic-wielding caricature overlooks that private-equity managers lose money if their investments fail.

Private-equity firms make long-term investments in underperforming companies and aim to create value—and turn a profit—by fixing inefficiencies. They raise capital from institutional investors like college endowments and public pension funds, which they often supplement with debt, to buy out public shareholders.

Managers are compensated with an annual fee—typically between 1.5% to 2% of a fund’s invested capital, which is taxed as ordinary income. Only if a company returns profits over several years that exceed a “hurdle rate”—on average 8%—do managers get a cut. If returns decline, outside investors can claw back profits from managers.