I'm a incoming freshman at the undergraduate level, and was wondering if someone could give me a quick simple, basic breakdown of the differences between IB, VC, PE, and Hedge Funds?
Investment Banking vs. Venture Capital
Investment bankers are advisors that work with companies to raise capital for investment in the business through debt and equity offerings and advise on transformative M&A transactions.
In investment banking there is a strict hierarchical structure that typically goes like: analyst, associate, vice president (or director depending on firm), senior vice president, managing director, C-suite.
Investment bankers are in the financial services industry and are at the beck and call of clients and therefore analysts and associates are often called to work long hours meeting clients demands. Analysts frequently work 65 - 85 hour work weeks.
Read More About Investment Banking with the below WSO Articles
- Read more about the hours of a banker in a detailed post on WSO
- You can read more about the day in a life of a banker on WSO
- Learn more about IB compensation on WSO
Venture Capital Overview
On the other hand, venture capital refers to financing start-up companies and small business that have long-term potential. Venture capital does not always mean monetary investment but can also be in the form of technical/managerial advice. While venture capital may seem similar to private equity, vc specifically seeks smaller and emerging companies.
Below are some characteristics of VC firms:
- Invest in startups
- Invest in less than a majority of equity in a company
- Prefer to diversify across a broad array of startups as they are unpredictable and often fail
- Venture capital firms invest in startups in technology, clean technology, and biotechnology
Venture capital firms invest in companies with both a high risk and a high reward. Because of this, they spread their investments more to prevent a failed investment from significantly impacting the fund.
For VC firms, the hierarchy is similar with differences in senior positions: analyst, associate, principals, and partners. From a compensation standpoint, associates in venture capital can expect to make anywhere from $130-250k.
You can check out a video about VC below.
You can read more about VC and PE in this detailed thread on WSO.
Private Equity vs VC vs. Hedge Fund
Private equity is similar to VC as they invest money into a company, but PE favors more established, private companies. There are several characteristics of a private equity firm that set it apart from a venture capital firm.
- Invest in established companies.
- Work with companies on operations.
- The goal is to improve efficiency, which then improves the bottom line.
- Typically acquire 100%, or at least a majority, of the companies they invest in.
- Invest in a wide variety of companies. If a company's processes can be improved, then it has a distinct appeal to private equity firms.
Private equity firms, unlike venture capital firms, invest in established companies that are somehow struggling. They then work with the companies over a period of time, which varies, to streamline the business, improving efficiency and, as a result, profits. They can do this because they acquire 100% or a majority stake of the company.
Private equity has a similar hierarchy to IB: analyst, associate, vice president, director/partner.
Hedge Fund vs. PE
A hedge fund's goal is to provide the greatest returns as quickly as possible. HFs tend to invest in highly liquid assets (stocks, short selling, options, bonds, futures, currencies, virtually anything and everything) which can turn a profit. They will then quickly flip to another asset. Due to the extremely liquid nature of HF, investors can cash out at any moment.
Hedge fund hierarchy follows as such, with some variation between firms: analyst, associate, portfolio manager, partner, president, c-suite.
Often times analysts coming from IB backgrounds are faced with the decision of which career track to recruit for - PE vs. HFs. What is important to understand is that PE and HFs have very different work flow. Private equity is often thought of as banking 2.0. Instead of making pitch decks, you are reading CIMs and building out financial analysis to help the partners determine if an investment is justified. On the hedge fund side, you will be working on idea generation and research. Hedge fund work is typically very meritocratic while PE remains very hierarchical.
You can read more about getting hedge fund jobs and internships on WSO.
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