Investment Banking vs. Private Equity
On the face of it, investment banks and private equity firms appear to do very similar things — they’re both involved in trading securities and mergers and acquisition (M&A). On closer inspection, while unarguably sharing much in common, including a talent pipeline, there are distinct differences.
What is investment banking?
Investment banks provide corporations, institutions and governments with two core services: underwriting (raising capital for clients by selling stocks and bonds to investors), and assisting in the negotiation and structuring of mergers and acquisitions (M&A)
What is private equity?
Private equity firms acquire and manage companies with the aim of increasing their value before selling them for a profit. Private equity firms raise capital for acquisitions by attracting investor money into proprietary funds. These investment vehicles belong to the alternative investment asset class along with hedge funds and venture capital.
Investment banking vs private equity: What are the similarities?
Both investment banks and private equity firms raise money for investing purposes, but that’s broadly where the similarities end.
Investment banks advise clients and raise money from capital markets on their behalf. Often divisions of larger banking entities, they provide a wide range of financial services, including underwriting, research, asset management, M&A advisory and facilitation, and securities sales, trading and corporate broking. The largest investment banks are household names like Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch and Deutsche Bank.
Private equity firms raise capital into proprietary funds they manage and then invest directly into private businesses. Private equity firms are often deeply involved in the running of portfolio businesses to grow their value and maximise return on investment (ROI) at point of sale, which can be in the long term, many years after an initial investment.
Types of funds
Investment banks deal with all asset classes and funds, including equity, fixed income (bonds, credit), forex, derivatives, cash and alternative investments, such as hedge funds and real estate.
Private equity funds are themselves part of the alternative investment asset class. They raise capital commonly from large investors, such as institutions (for example, pension funds and sovereign wealth funds), insurers and high net worth individuals (HNWIs). They generally do not buy securities with raised capital but rather tangible assets, such as real estate, or by directly investing in businesses, often controlling stakes affording them board seats and management roles.
Buy side vs sell side
It’s helpful to understand that financial services and therefore careers are generally split into buy side and sell side — the side that seeks to invest in a business (buy side) and the side that facilitates these investments (sell side). Investment banking is on the sell-side and private equity buy side.
Investment banks sell their wide range of financial services to corporations with the goal of raising capital on their behalf or facilitating M&A, so this can include advisory services on acquisitions and selling a client’s securities, which can involve initial public offerings (IPOs) or debt restructuring.
Private equity firms are on the look out for businesses to buy, with the view to altering their capital structure, operational performance or management to achieve profits for their institutional and HNWI investors.
Transactions and investing
Investment banks generally assist in large, complicated financial transactions. They provide advice on a company’s value and how best to structure a deal if a client is considering an acquisition, merger or sale.
Investment banks are middlemen between a company (client) and investors when the client wants to raise capital by issuing stock or bonds. Investment bankers price financial instruments to maximise revenue and navigate regulatory requirements. When a client company goes public (launches an IPO), an investment bank will buy all or nearly all of its shares, then, acting as a proxy, will sell the shares on the market.
As an example of the types of transactions investment banks assist with, Goldman Sachs, the top adviser globally by value in the first nine months of 2022 with $746 billion worth of deals, is advising Microsoft in its $68.7 billion acquisition of Activision Blizzard and MásMóvil in its $19.6 billion merger with Orange.
On the buy side, global private equity generated $512 billion in buyout deal value during the first half of 2022, with average deal size close to $1 billion. Private equity is well known for taking high growth startups and medium-to-large businesses to listing on the stock exchange and being publicly traded.
However, they are also known for leveraged buyouts (LBOs), which goes the other way, delisting a company. This was the case when Vista Equity Partners and Elliott Investment Management acquired Citrix Systems for $16.5 billion and combined it with Tibco Software, a business in Vista’s portfolio. Citrix was delisted from Nasdaq. The deal was done via a combination of cash and equity from Vista and Elliott leveraged against financing in the form of loans and debt underwritten by investment banks.
On paper, careers at private equity and investment banking look similar, but there are notable differences in terms of remuneration, work hours, corporate culture and the fact that private equity is often seen as an exit strategy for investment bankers, and not the other way round.
Salary and Compensation
Both routes offer a lucrative remuneration package (base salary + bonus), but private equity has the edge over investment banking. This is because as you move into more senior roles at a private equity firm you become eligible to ‘carry’, which is a share of profits from investments. This can significantly boost income, even far outstripping base salary and bonus taking senior level annual income into the 10s and even 100s of millions, though this is very dependent on the size of firm, ability to source and execute deals, and drive ROI for investors.
Fund sizes can be broken down into ‘mega-funds’ like KKR, Blackstone or CVC Capital Partners, ‘elite boutiques’ like Lazard, Evercore, Moelis or Centerview, and then smaller national or regional funds, and sector or goal specialists, for example, those that focus on energy transition and renewables.
The average base salary for a private equity analyst in the UK is between £60,000 and £90,000 (depending on experience) plus up to 100% bonus (dependent on personal and fund performance), so total annual take home could potentially be up to £180,000, but this will vary considerably depending on fund size, previous experience and performance.
A first-year investment banking analyst’s basic salary is in the £60,000 ballpark plus an annual bonus that might not reach 100% of base salary in the first year but can go as high as 75%, bringing take home to £105,000. Again, bonus is based on personal as well as team performance.
It’s widely believed that one of the reasons people leave investment banking for private equity is for a better work-life balance and fewer working hours per week. Now while this may be true to a degree, at your peril view private equity as an oasis of big bucks and the easy life.
While 80–100-hour work weeks are not unheard of in investment banking, especially for analysts and junior associates, and especially at times of high activity, say around active deals, at private equity don’t be surprised if you work 70-hour weeks when a project is at a critical point. Working hours are more like 9am to 7-9pm in private equity, with some hours at weekends not uncommon, while for investment banking you might start at 10am, but you might not leave till midnight, and you may well be required at weekends too.
Job titles and trajectories are similar, though the hierarchy in private equity is a bit flatter:
Investment banking: full-time analyst (2-3 years) — associate (2-3 years) — senior associate (2-3 years) — vice president (2-3 years) — director / senior vice president (3-4 years) —managing director
Private equity: analyst (2-3 years) — associate (2-3 years) — senior associate (2-3 years) — vice president (2-3 years) — director or principal (3-4 years) — managing director or partner
Getting into an investment bank is usually straight out of university with a minimum 2:1 undergraduate degree into a first-year analyst role, having done several internships at investment banks or relevant businesses. Post-graduates with MBAs plus work experience will often enter as associates.
Junior level hiring at private equity firms is traditionally someone with 2-3 years’ experience in an investment bank joining as an associate. These days in the battle for talent, funds are also recruiting undergraduates into analyst roles, similar to the investment banking pathway — top grades from good schools plus plenty of relevant work experience.
Private equity vs investment banking key tasks
The entry-level investment banking analyst/associate has three core tasks: pitchbook creation, financial modelling, and administrative work.
Private equity on the other hand is a little less rigid, yet there are still standard functions in which associates will participate: fundraising, screening for and making investments, managing investments and portfolio companies, and exit strategies.
The main cultural difference between investment banking and private equity is perhaps the ‘corporate feel’. When we see depictions of strict, high-stress, suit and tie wearing, 14-hour day corporate culture in films, this often takes inspiration from investment banking. Whereas private equity firms, which are smaller and very fussy about who they recruit, are generally perceived to be less rigid, allowing hires to maintain performance as they see fit.
Work-life balance is generally better than in investment banking, though don’t be fooled, you will work hard in private equity. Associates at private equity firms will generally take on more responsibility that directly affects fund performance, they’re closer to the action than an analyst/associate at an investment bank. Working in smaller teams, they will interact with everyone including the most senior partners. At bulge bracket banks, think Goldman Sachs, JP Morgan and Morgan Stanley, it’s unlikely senior management will know your name and what specifically you’re working on.
Both investment banking and private equity are highly prized and sought-after careers in financial services, though they’re notably different. Choosing between the two is often thought of in terms of work-life balance and remuneration, but it’s also worth thinking about your career, what interests you and which you think would be more challenging and rewarding for you.