Investment Banking Vs Private Equity
Discover the differences between investment banking and private equity.
What Are Investment Banking and Private Equity?
Investment banking and private equity are two different subfields of finance, each with its distinct job descriptions, workplace cultures, pay scales, and career opportunities.
Two of the most prominent and competitive finance sectors are investment banking and private equity, which both provide excellent chances for career progression and high salaries.
Private equity entails making investments, whereas investment bankers offer guidance and help with obtaining cash. Because they frequently have their own money invested in other companies, private equity firms are generally far more hands-on than investment banks.
For analysts and consultants in investment banking, private equity is typically a frequent departure strategy.
Key Takeaways
-
Investment banking and private equity are both financial services that involve investing in companies and assets to generate returns.
-
Investment banks provide advisory services for corporate finance, mergers and acquisitions, and securities underwriting.
-
Private equity firms support the management and expansion of private enterprises and invest in them to eventually sell them for a profit.
-
Private equity investments often involve leveraging the acquired company's assets, which can create higher returns and risks.
-
It requires hard work, analytical skills, and the ability to manage complex financial transactions. Both investment banking and private equity can be highly lucrative.
What Are the Differences Between Investment Banking and Private Equity?
The distinctions between the jobs of an investment banking analyst/associate and a private equity associate are:
| Investment Banking | Private Equity |
|---|---|
| You work for businesses rather than homes, much like a real estate agent. You act as a company's representative and aid in its acquisition, sale, or capital raising in commission. | It is similar to real estate investing in that it performs purchasing residential and commercial buildings, making improvements to them, and then reselling them for a profit after a set period. However, instead of purchasing real estate, you work with major corporations. |
| Investment banks may also offer complementary services, including market-making and securities trading for equities (i.e., stocks and their derivatives, such as options) and fixed income, sometimes known as FICC (fixed income, currencies, and commodities) | Private Equity firms increase capital from limited partners (LPs) or outside investors and use that capital to buy, operate, and develop businesses before selling them for a premium. |
Since private equity firms participate in businesses that are private at the outset or become private due to the investment, the sector is known as "private" equity.
The outside investors or Limited Partners may include:
- Pension funds
- Endowments
- Insurance companies
- Family offices
- Funds of Funds
- Sovereign Wealth Funds
- High-Net-Worth Individuals
Investment banking and private equity financial industries are demanding and profitable but call for distinct skill sets and personalities. Assessing your talents and interests is crucial before choosing a job in either sector.
To correctly evaluate and contrast these vocations, we will examine their respective industries, job descriptions, cultural norms, salaries, and skill sets.
Investment Banking Vs. Private Equity
Investment banking is a service provided by financial institutions that helps firms selling securities like stocks, bonds, and other financial instruments and governments raise money by underwriting.
Additionally, investment bankers advise clients on restructuring, mergers & acquisitions, and other corporate finance activities. Contrarily, private equity entails investing in private businesses to enhance their operations and raise their value.
Private equity firms employ money collected from investors to buy majority ownership in a business, make operational upgrades, and then sell the business or float it on the stock market to recover their investment.
There are some significant distinctions between investment banking and private equity:
| INVESTMENT BANK | PRIVATE EQUITY |
|---|---|
| Investment bankers consistently work on a variety of financial transactions, including bond issuances, IPOs, and merger and acquisition agreements. | Private equity firms prioritize purchasing and enhancing the operations of their portfolio companies. |
| It is concentrated on offering financial advising and underwriting services. | It is concentrated on purchasing and investing in private enterprises. |
| Investment bankers are normally paid through fees and commissions. | Private equity professionals are paid through a combination of management fees and carried interest. |
| It is more organized but less entrepreneurial than private equity. | It is less organized and has a more entrepreneurial mindset than investment banking, which has a highly structured business with well-defined career pathways and functions. |
| Analysis should be done carefully in an abstract manner. | Analysis should be done carefully, but here it is more critical. |
At last, the financial business is divided into two complementary sectors: investment banking and private equity. Each has its particular traits, methods, and strategies for making investments and offering financial services.
Exit Options Available to Investment Bankers
Here are some of the popular exit options available to investment bankers:
- Start-ups: They are a popular choice for investment bankers seeking to apply their financial knowledge in a dynamic and entrepreneurial environment. Multiple investment bankers transition to start-ups as they strive to achieve more significant results and commit more to their work.
- Private Equity: It is another popular exit option for investment bankers. In private equity, bankers can use their financial expertise to help manage and grow portfolio companies, often to sell them for a profit eventually. Private equity roles can be demanding, but they offer high potential for financial rewards and a chance to work on complex and exciting deals.
- Hedge funds: They are another attractive exit option for investment bankers. Hedge funds are investment vehicles that use complex strategies to generate returns for their investors, and they rely heavily on financial expertise and analysis.
- Many investment bankers move into hedge fund roles as portfolio managers, analysts, or other positions where they can apply their skills to manage large amounts of capital.
- Business schools: They are a standard goal for investment bankers to pursue cutting-edge degrees or transition into academia. Many investment bankers use their experience in the industry to pursue MBA programs or other advanced degrees in business or finance.
- Corporate growth: Finally, some investment bankers move into corporate growth roles, where they work for large companies and help to identify and execute strategic initiatives. Corporate growth roles often involve extensive analysis and financial modeling, making them a natural fit for investment bankers with experience in the industry.
Overall, the variety of exit options available to investment bankers allows them to pursue diverse career paths and grow professionally beyond their time in the industry.
Investment banking is profitable. Private equity has good prospects. Investment banking pay is on the rise. The finance industry is evolving. Mergers and acquisitions are being influenced by Wall Street.
Job Profile
Investment banking (IB) and private equity (PE) are two prominent areas within the finance sector that appeal to many finance professionals due to the high compensation and the nature of the work involved.
However, the job profiles for each are distinct. Below is a comparison of the two based on various parameters:
Investment Banking
An investment banking analyst's primary responsibilities often include writing pitch books, modeling, and office duties.
A pitchbook is a client presentation for the buy side. As an analyst, you must be aware of the market's overall structure and the graphical depiction of potential exchange ratios. Other than that, managing several agreements at once would be helpful.
Which method would you use? Because they would depend on your preparation of the models, you would prepare the merger (or any other) model for several deals and search for flaws and defects.
It would help if you were prepared for every eventuality. It would be best to manage sensitivity analysis at many levels to do that. Your administrative responsibilities as an investment banker would be minimal to nonexistent.
However, it would be beneficial to make a few adjustments so that the pitchbook presentation and modeling, which serve as the foundation for essential choices, are the main focus.
Private Equity
Private equity associates must undertake the following four tasks daily:
1. Fundraising
Private equity businesses raise money by fundraising from institutional investors, ultra-wealthy people, and other means. Private equity firms must successfully fundraise to have the money to manage their existing assets and invest in new prospects.
2. Investment Screening and Execution
Identifying possible investments, performing due diligence, negotiating, and concluding transactions are all parts of the investment screening and execution process.
Private equity firms frequently make investments in businesses that are cheap, underperforming, or have a large room for expansion. A thorough study and analysis are required to assess an investment's prospective returns and dangers.
3. Portfolio Management
Managing a portfolio entails managing the investments made by an equity-private company. This entails keeping an eye on performance, offering portfolio firms strategic direction, and striving to boost productivity and profitability.
Note
A private equity firm's ability to maximize the profits on its investments depends on effective portfolio management.
4. Exit Strategy
It is the method a private equity fund uses to withdraw from a portfolio business. The process can be done by selling the business to another investor or going public through an initial public offering (IPO).
Private equity investing requires a strong exit plan since it enables the business to realize returns on its investment and create value for its investors.
Senior professionals typically solicit money, but associates are sometimes requested to assist with the presentation. They should learn about the funds' historical performance, previous investors, and investment approach.
Associates frequently have to conduct credit analysis on the fund itself. A crucial component of private equity is screening. Associates play vital parts.
They should learn about the funds' historical performance, previous investors, and investment approach.
To determine if investing in these initiatives would be successful, they examine the available investment options and use financial models (such as Discounted Cash Flows, the Net Present Value technique, etc.).
Note
Models for investment bankers and private equity associates are very different from one another. The private equity associates succeed in navigating life's ups and downs. Investment bankers create models concurrently to impress clients.
Associates assist with operational turnaround and increased operational efficiency (EBITDA, ROE, etc.) while managing investments and portfolio firms. Additionally, they focus on the exit plan, which demands careful examination.
To quickly solve the financial puzzle for their clientele and investment portfolio, private equity associates must be well-versed in finance and have access to all the necessary tools and methodologies for appraisal.
Work Culture
The work culture in investment banking (IB) and private equity (PE) can be quite intense, given the high stakes, complexity, and significant amounts of capital involved in both industries.
The work culture of both positions is described below.
Investment Banking
If you want to attain a work-life balance, it is best to choose a career other than investment banking.
Those who don't mind working long hours every day should avoid the investment banking industry. If you are okay with arriving at work at 9 a.m. and leaving at 2 a.m. most days, investment banking is an option.
It is a job with a lot of pressure. Deals must be negotiated with all of one's heart and soul. However, there are two clear advantages to working 16 to 20 hours every day.
Instead, there is no cap on the quantity you may make. As a result, you may earn as much money as you like, both in salary and extra payments for each contract.
Second, you will consistently have the possibility to interact with the most proficient individuals in the industry. Learning them will enable you to close more companies and establish yourself as a major figure in the initiative.
But when addressing these two significant advantages, few people mention one of the key topics that investment bankers frequently discuss. It is also a friendship.
Any investment banker will tell you that their closest friends are those they work with after school or throughout college and who they study all night to close a significant transaction.
And that is one of the main advantages of this demanding profession.
Private Equity
Private Equity associates often work between 8 and 12 hours daily, assuming everything goes smoothly (which only happens sometimes). Weekends are typically spent with family or partaking in hobbies by them.
A private equity associate has a significantly better work-life balance than an investment banker. There are instances when you must work on the weekends, but less frequently than an investment banker.
The group is generally undersized (around 10-15 members), offering you the opportunity to articulate with individuals who are more experienced than you about various topics.
The workplace is like a cubicle atmosphere where everyone must work towards a single objective to get the intended outcome.
For instance, associates at private equity companies have a greater influence on sales and trading due to their proximity to activity and investment.
On the other arrow, investment bankers influence the company's sales and trading negligibly.
Compared to investment bankers, private equity associates have a better work-life balance.
Compensation
Interestingly, when the earnings for each profession are compared, investment banking professionals earn less than private equity associates.
Private equity associates make a lot of money since they typically decide to work for private equity companies after working as investment bankers.
You might thus claim that they are now reaping the rewards of their previous labor as private equity colleagues.
Take a look at how each pathway is compensated.
Investment banking
Your first year's salary would be between $133k to $140k. The second year might see you earning between $155k and $165k annually.
The increase is apparent in the second year, although not to the extent that was anticipated. Around $175k to $195k per year is what you expect in the third year.
For investment banking analysts, the facts mentioned above can apply. To join as an investment banking associate, you would make much more money than an analyst in the first year.
Your annual pay as an investment banking associate would be in the range of $150-$185k.
Private Equity
Your pay as an associate in private equity is much higher. Even yet, when a company is just getting started, they pay less than reputable private equity companies.
In the first year as an associate, your salary might range from $124k to $220k. You would receive between $220,000 and $250,000 in the second year.
Further, you could earn $250k and $300k a year as an associate in the third year.
Investment Banking vs. Private Equity — Pros and Cons
There are a lot of pros and cons to Investment banking and Private equity. It's all about learning right, so keep knowing more about them.
Investment Banking
The pros are:
- Rewarding and Promising Career: It is a career that positions you as the business hub wherever you go and prepares you for chances with more potential. It instills in you the value of perseverance and the power of singular focus to achieve remarkable things.
- Lucrative Financial Benefits: You get excellent money from it. In addition to receiving a salary that only a select few people can achieve in two to three years, you will also get a sizable bonus.
- Valuable Professional Network: You'll establish a network that most powerful individuals can't. Furthermore, you know the benefits of a high-value network in this complicated business context.
- Strong Camaraderie with Colleagues: You will develop an exceptional bond with your coworkers, who you will spend all days and nights working with.
The cons are:
- Demanding Workload: A job in investment banking is not for the timid. Even on the weekends, you must work for at least 16 hours of labor.
- Poor Work-Life Balance: As a result, there would be no work-life balance, and your thinking may suffer if you learned how to take care of your health.
- Focus on Business Transactions: Usually, Investment banking focuses more on business transactions than an in-depth model study.
- Unpredictable Nature of PitchBooks and Models: As a result, investment bankers try to persuade their customers to forgo constructing elaborate models. The two fundamental components of investment banking are pitchbook presentation and model construction, which are sometimes under control.
- Balancing Client Demands: The investment bankers employ the inputs after weighing what clients desire vs. what they can construct, but the clients directly control both elements.
Private Equity
The pros are:
- Join an Exceptional Team and Drive Success: If you enjoy operating as an associate in a private equity company, you would be on a private equity team if you wanted to work on a fantastic team and help firms succeed.
- Extensive Knowledge Required: It would be helpful if you recognize a bunch of facts. You require knowledge well beyond that of an investment banker.
- Thorough Due Diligence: Be ready to conduct in-depth research and analysis, as a detailed investigation is critical in private equity.
- Work-Life Balance: Enjoy a relatively good work-life balance as a private equity associate, with the ability to have weekends off and work a standard 10-hour day.
- Financially Rewarding Career: Living as a private equity associate is advantageous financially. You will obtain satisfactory earnings in the future.
The cons are:
- The Drawback of Buy-Side Focus: Functioning as a private equity associate has a few drawbacks. The only issue is that because you are on the buy side of the firm, you need to know a lot more when you develop models to explore everything in depth.
- Limited Attention Compared to Investment Banking: Though you cannot call it such a con, you will receive less attention than in the investment banking sector.
Bottom Line
Being the center of attention and stealing the show are key components in investment banking. After earning your MBA from a reputable university, you should choose investment banking if you are more interested in business selling.
Since private equity is more internal than going outside and grabbing business, it is more about passion. So, choose this if you enjoy investing and conducting in-depth analyses.
An investor's or financially prudent person's average day includes analyzing a large amount of financial information to reach sound judgments.
Fortunately or unfortunately, there are many methods for earning money nowadays, so only well-equipped people can generate actual returns and ensure steady expansion throughout their holdings.
The question is, "Which industry is better?" Investment banking or private equity constantly arises among finance sector experts. Yet, the answer to this question is subjective and depends on individual preferences and career goals.
Note
Remember that most people working in private equity previously pursued careers in investment banking.
Investment banking and private equity offer unique opportunities for skilled growth and financial tips, and the suitable choice ultimately relies on personal preferences.
Unfortunately, it is impossible to choose between investment banking and private equity as the "better" jobs in an absolute sense. Your preferred lifestyle, culture, and financial goals depend on the kind of work you ultimately want to accomplish.
On the other hand, investment banking puts you at the center of the capital markets and exposes you to a broader variety of financial transactions (there is a proviso, though; the breadth of exposure relies on your group).
Investment bankers have several exit options that make it an attractive career choice. Others may move into hedge funds, venture capital, or corporate finance roles.
The type of exit options available to investment bankers allows them to seek eclectic career paths and continue to grow professionally beyond their time in the industry.
Investment Banking Vs Private Equity FAQs
The roles of analyst, associate, vice president, director, and managing director are frequent in investment banking. Common job paths in private equity include managing director, principal, senior associate, associate, and principal.
Both jobs demand the ability to manage intricate financial transactions and, strong analytical abilities, financial modeling experience, and outstanding communication skills.
While private equity entails investing in and managing private enterprises to sell them for a profit, investment banking comprises counseling clients on corporate finance and securities underwriting.
Leveraging acquired firm assets is a common practice in private equity investments, which can increase returns but also increase risks.
Fees for consulting services, underwriting securities, and other financial activities are how investment banks generate revenue.
Private equity firms generate profits by purchasing private businesses, enhancing their operations, and then selling them for a profit.
Some contemporary trends in the sectors include a focus on sustainability and social responsibility, expansion in new markets, and growing use of technology and data analytics.
Researched and authored by Sethuraman | LinkedIn
Reviewed and edited by Raghav Dharmarajan
Free Resources
To continue learning and advancing your career, check out these additional helpful WSO resources:
or Want to Sign up with your social account?