Investment Banking Vs. Private Equity

Investment banking and private equity are two of the most prestigious and competitive areas in finance, offering significant opportunities for advancement and high compensation. However, there are many differences between the two career paths. Investment bankers provide advice and assistance in raising capital while private equity involves making investments. Private equity is often perceived as an exit opportunity for investment bankers.

Both spheres demand top talent and require strong numerical, business, and financial acumen as well as soft skills such as communication and presentation. The ability to manage relationships is particularly important. While a degree in business may help get an interview, graduates from other areas that require technical expertise are also in high demand. For example, some sectors such as healthcare, telecommunications and technology (including artificial intelligence and robotics) require specialized expertise. Degrees in mathematics or physics are also quite well received. Both careers demand exceptionally long hours, with investment banking often requiring analysts and associates to work 80 hours a week or more. Private equity generally offers a better work/life balance, but long hours may be required, particularly during the execution phase of a deal.

Key Learning Points

  • Both career paths hold candidates to extremely high standards and require robust numerical and financial literacy, along with communication, presentation, and relationship building skills.
  • Investment banks offer support, advice, and facilitation of transactions such as IPOs, M&A, debt issues, and broker execution.
  • Private equity firms are buy-side investment firms that invest their own money in companies that are not publicly traded.
  • Both areas offer excellent compensation, but particularly in investment banking the hours can be exceptionally long.

What is Investment Banking?

Investment banking is the business of offering advice and capital raising services to clients. These clients can range from public and private companies to institutions and governments. Investment bankers can underwrite new debt and/or equity securities issues for clients and support them through the sales process. Debt capital is raised through bond offerings while equity capital is raised through an Initial Public Offering (IPO). Other activities include assisting, advising, and facilitating Mergers and Acquisitions (M&A), restructuring companies, or executing broker trades for institutions and private investors.

The day-to-day activities in investment banking are diverse and depend on the function and seniority of the position. On the brokerage (sell-side), equity analysts may conduct research to make buy, hold or sell recommendations. Brokerage and investment banking are separated by a “Chinese wall,” an ethical barrier to prevent conflicts of interest. Professionals may participate in market-making activities by connecting buyers and sellers and providing liquidity. Across the Chinese wall, investment bankers work on deals to raise capital, buy or sell companies, or offer advice on restructuring and other business issues. The hierarchy varies across different institutions, but typically an analyst class is composed of university graduates while new MBAs are hired as associates. The progression then goes to vice president, senior vice president, and finally, the golden ring of managing director.

Investment banks are classified according to their size, based on several factors such as trading volume, the number of offices, and the number of employees. Banks normally fall within four categories – regional boutique banks, elite boutique banks, middle-market banks, and bulge bracket investment banks (smallest to largest). The latter include large US names such as JP Morgan, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley, as well as HSBC and Barclays from the UK, the French BNP Paribas and Societe Generale, Swiss UBS and Credit Suisse, and Germany’s Deutsche Bank.

What is Private Equity?

Private equity firms are investment businesses that allocate capital to privately held businesses (i.e. not publicly listed and traded on an exchange). They source capital from wealthy individuals, pension funds, insurance companies, and other institutions to invest and realize a return. In addition, they also charge a management fee that usually represents a percentage of the assets under management.

Private equity investors typically exit an investment through an Initial Public Offering (IPO), which is the process of taking a company public. While this is also the objective of venture capital firms, it is important to distinguish between them since both the type and size of investee companies, along with ownership stakes, are different. Venture capital is often limited to startups in areas like technology and biotech, while private equity firms may invest in companies of any size from any industry. They can use both cash and debt to make investments, where venture capital firms use only equity.

The four main functions in private equity companies are:

  • Fundraising
  • Screening and making investments
  • Managing investments and portfolio companies
  • Exiting the investment

Four Main Functions in Private Equity Companies

Some of the largest institutions in private equity include The Blackstone Group, CVC Capital Partners, KKR & Co. and The Carlyle Group.

Education and Skills

When it comes to education and skills, both investment banking and private equity are looking for talented individuals who can demonstrate high numeracy, intellectual curiosity, and strong soft skills. While a bachelor’s degree is a prerequisite for an analyst role, many analysts pursue graduate degrees such as a Master’s in Finance or Master of Business Administration (often paid for by the bank) and return to move on to associate positions.

Another way to demonstrate a higher level of competence is by obtaining professional qualifications like the Chartered Financial Analyst (CFA) designation or the Chartered Alternative Investment Analyst (CAIA) designation.

Both investment banking and private equity require specific skills like financial modeling and financial statement analysis, as well as a strong knowledge of markets and economics. Receive the same training as new hires to the top 4 investment banks with our online investment banking course. Or enroll on our online private equity course, to master the core technical skills, from in-depth financial statement analysis to structuring complex add-on acquisitions in a leveraged buyout.

Hands-on experience with financial software could also be a plus. Last, but not least, superlative communication, presentation and writing skills are also essential. Our online business toolkit course will help you to unlock your presentation potential, understand how to develop your writing skills to communicate effectively, and build your brand.

Access the free download to learn more about a typical career path in Private Equity, covering progression, education and certifications.

Hours

Lifestyle and work/life balance are quite different when comparing investment banking and private equity. In terms of work hours, investment banks demand anywhere from 60 to 80 hours per week, and analysts and associates often work at least one weekend day as well. In contrast, private equity (of course depending on factors such as team resources, current workload, and deal pipeline) could require anywhere from 40 and 60 hours per week but rarely demand weekends.

Salary

Compensation for both career paths can be quite lucrative. Entry-level positions for investment bankers at bulge bracket banks typically start from $90,000 with bonuses ranging (based on performance) anywhere from 50% to 100%.

In private equity, analysts can expect a starting salary of around $100,000 plus a performance-related bonus. After a few years of experience, both careers offer base salaries in excess of $150,000.

Exit Opportunities

Since both careers are intellectually demanding and recruit only top-tier talent (typically from Ivy League universities), it’s not surprising that there are quite a few exit opportunities.  The financial expertise acquired through investment banking can be applied in areas like asset management, private equity, venture capital, and hedge funds. Private equity offers a more attractive work/life balance but is also potentially even harder to break into. Like investment banking, PE also offers opportunities to move into asset management, hedge funds, venture capital, or other senior roles in finance.

Conclusion

While both careers are highly regarded and financially lucrative, the choice is personal. Investment banking is typically viewed as glamorous but also requires longer hours and the sacrifice of a personal life. Private equity is extremely prestigious.  Compensation for both careers is very high, but the work/life balance in private equity is better, it is often the preferred exit route for investment bankers who have a few years of experience.

To learn more about the typical career path in Private Equity, access the free download.

Additional Resources

Investment Banking Course

Guide to Investment Banking Summer Internships

Investment Banking Summer Internships 2023