Investment Banking vs. Private Equity

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.

Services offered
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.

Career opportunities
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.