Investment banking vs. private equity: fundamentals and key differences
Table of content
Investment banking and private equity both raise capital for investing purposes. However, they do it in different ways.
This article looks at the basics of investment banking and private equity and explains the main differences between them. Read on to learn the details and find out the career opportunities in investment banks and private equity firms.
Key highlights:
- Investment banks help clients to raise capital and attract investments to the business.
- Private equity firms help clients to invest their money in a way that will bring the best profits.
- Private equity funds and investment banks mostly differ by goals, strategies, regulatory challenges, career specifics, culture, and source of earnings.
What is investment banking?
Investment banking is a branch of banking that helps clients raise capital and attract investments to businesses, governments, or other types of organizations. Investment banks usually assist in organizing such complex financial transactions as mergers and acquisitions (M&A) or initial public offering (IPO) underwriting.
As of the end of 2023, the global revenue of investment banks was estimated to reach $0.33 trillion. It’s expected to grow at a compound annual growth rate (CAGR) of 2.31% and reach $0.37 trillion by 2028.
Source: Statista. Investment banking worldwide revenue (as of October 2023)
Investment banks are normally classified based on their trading volumes, number of offices, or number of employees. Thus, they’re typically divided into bulge-bracket investment banks, middle-market banks, elite boutique banks, and regional boutique banks.
The most prominent investment banks include JPMorgan Chase & Co, Morgan Stanley, Bank of America, Credit Suisse, and Goldman Sachs.
Main services
The key function of investment banks is advisory, which includes these services:
- Pitchbook creation
Investment bankers draft pitchbooks for businesses that are considering raising capital. This includes creating all the materials and presentations that illustrate the company’s attributes, which help sales teams sell products, generate new clients, or attract public and private investors.
- Modeling
Investment banking associates create transaction models for clients. It helps them consider all the important factors and choose the best investment option to conduct a successful deal and raise the required capital.
- Other administrative work
This includes everything apart from modeling and pitchbook creation. The administrative work of an investment banker usually corresponds to searching for potential transactions and interacting with clients.
Career opportunities
Typical jobs in the investment banking industry include consultant, capital markets specialist, investment banking analyst, trading specialist, research associate, and others.
More facts about the investment banking career are in the table below.
| Requirements | Appropriate education (such as MBA, CFA, CFP, FRM, or CPA) Analytical skills Entrepreneurial skills Management and leadership abilities Strong communication skills Networking skills Problem-solving ability Research skills |
| Working hours | 60–100 hours a week |
| Salary (associate) | $160,000–$283,000 annually |
| Exit opportunities | Wide exit opportunities: Private equity Corporate finance Hedge funds Venture capital Tech startups Asset management |
What is private equity?
Private equity is also an investment business, however, it has several key differences from investment banking.
Private equity funds (PE funds) are responsible for managing investments using funds raised from high-net-worth individuals or big institutional investors. For the pooled money, a private equity firm buys shares in private companies or gains control of a public company to make it private and de-list from the stock exchange. In short, private equity firms search for investment opportunities for their clients.
Note: Though private equity is often confused with venture capital, these are two different investment types. While venture capital investment typically involves investing in a startup, private equity firms usually invest in mature companies.
As of 2022, the global value of private equity capital invested worldwide was estimated at $2,248 billion. At the same time, the value of global dry powder has reached $2.59 trillion in 2023.
Source: Statista. Value of private equity (PE) capital invested worldwide from 2017 to 2022
Private equity firms tend to be divided into two main categories: venture capital firms and buyout firms.
The Blackstone Group Inc., CVC Capital Partners, Thoma Bravo, TPG Capital, and Vista Equity Partners are key players in the private equity investment market.
Main services
The key function of a private equity firm is to provide private equity investors with profit. Thus, the main services of a PE fund include:
- Fundraising
Private equity firms must first source capital for their investments. Typically, the capital is pooled from outside resources such as wealthy individuals or pension funds.
- Sourcing deals
Having the capital for investments, private equity associates then search for deals that could be a potential investment.
- Making investments and analyzing companies
Having several candidates for investment, private equity specialists then thoroughly review portfolio companies and their investment potential. The process includes investigation and interviews. Once the decision on a company is made, a PE firm makes an investment.
- Exit strategies
Private equity firms also develop exit strategies for investors specifying when the investment is deemed successful and the money can be withdrawn.
Career opportunities
Typical jobs in the private equity industry include associates, analysts, and other types of private equity specialists.
More specifics about the private equity career are given in the table below.
| Requirements | At least two years of experience within the banking industry Strong communication skills Networking skills Technical knowledge Problem-solving ability Management skills Analytical skills Research skills |
| Working hours | 40–70 hours a week |
| Salary (associate) | $146,000–$257,000 annually |
| Exit opportunities | A few exit opportunities: Asset management Senior roles in finance |
Investment banking vs private equity: what’s the difference?
The main differences between investment banking and private equity fall within five main categories described in the table below:
| Investment banks | Private equity firms | |
| Deal side | Sell-side | Buy-side |
| Strategy | Sell a business to a potential investor | Make money for an investor and a PE firm |
| Regulatory challenges | More strictly regulated | Less strictly regulated |
| Culture | More stressful and less flexible | Less stressful and more flexible |
| Source of earnings | Commissions and fees for services | Fixed management fee for the pooled capital (usually, 2%) + performance fee (as much as 20%) |
Let’s now specify the key private equity/investment banking differences.
Investment banks
This is what investment banks are all about.
Deal side
Investment bankers usually work on the sell side of the deal, which means they sell business interests to potential investors. Investment banks typically assist companies in going public or undergoing mergers and acquisitions.
Strategy
The key goal of investment banking firms is to sell businesses or raise capital from potential investors. It presupposes that investment banking specialists prepare presentations to clients intending to “sell the idea”. Such presentations require deep and careful analysis.
Regulatory challenges
In 1933, investment banking was legally separated from commercial banking in the United States. However, this barrier was removed in 1999 by the Gramm-Leach-Bliley Act. Now, the investment banking industry is heavily regulated mainly with the proprietary trading restrictions by the Dodd-Frank Act of 2010.
Culture
The corporate culture of investment banks is considered more stressful than private equity firms.
Investment bankers typically have a strict, suit-and-tie corporate culture with 10+ working hours a day and a less flexible schedule.
Source of earnings
Investment banks earn from the assistance and consultancy services they provide. The earnings are usually made up of commissions and fees for their services.
Private equity firms
This is how the operations of private equity firms are characterized.
Deal side
Private equity firms usually represent the buy side of the deal. Private equity firms buy business interests on behalf of the investors that have already put up money into a private equity fund.
Strategy
The key goal of private equity funds is to make a wise investment, and thus, make the investor and the firm money. That’s why the strategy is to find an investment opportunity that will be the most beneficial. Such an approach presupposes in-depth research that’s focused on detecting how the company would allocate capital investment.
Regulatory challenges
The private equity industry is considered to be less regulated than investment banking. The logic behind such an approach is that private equity funds usually deal with sophisticated and wealthy investors who can take care of themselves.
However, the Dodd-Frank Act of 2010 has brought more regularities to the PE industry and the first private equity regulatory agency was established in 2012.
Culture
The corporate culture of private equity firms is usually more relaxed and less stressful when compared to investment banking. PE specialists usually work 40–70 hours per week and have a more flexible schedule.
Source of earnings
Private equity firms earn from charging a management fee for the pooled money (typically, 2%). Additionally, there’s a performance fee that can be as much as 20% of the profits received from the investment.
Manage your projects with iDeals
Both investment banks and private equity firms often opt for technological advancements during their work to improve process efficiency, ensure productive collaboration, and secure all confidential and highly sensitive client information.
Virtual data rooms are an important solution for investment banks and PE funds. They securely store large volumes of data on the cloud and ensure effective collaboration between all the parties involved in a project or a deal.
For instance, iDeals virtual data room can streamline investment banking or private equity operations with the help of the following features:
- Multi-project management
- Detailed audit trails
- Granular access controls
- Customized branding
- Built-in redaction
- Advanced Q&A sections
Investment banking and private equity are both well-paid jobs. According to the data presented by Glassdoor, the salary range for private equity and investment banking associates is pretty similar.
However, the compensation ceiling is much higher in private equity than in investment banking — $2 million per year compared to $600,000 per year.
Typically, yes. At least two years of experience in the banking industry is required to get into a private equity firm. At the same time, to get into an investment bank, a certificate of appropriate education is enough (such as MBA, CFA, CFP, FRM, or CPA)
Both private equity and investment banking are considered prestigious. However, the work/life balance in private equity firms is better, and the compensation ceiling is higher.
Generally, yes. Private equity associates work 40–70 hours a week, while investment bankers can work as much as 60–100 hours a week.
Revolutionize your deal management
Begin your 30-day full-access free trial today