When companies want to raise funds, they often turn to investment banks and private equity firms to help them. The difference between private equity vs. investment banking is that private equity primarily focuses on private companies — the firm invests in a company and gains some control over that company’s decisions moving forward. On the other hand, investment banks offer a broader range of financial services and typically work with large corporations and public companies.
If you’re interested in a finance career, both of these industries offer lucrative career paths — but there can be significant differences in their work environments. In this guide, we’ll walk through the main differences between private equity vs. investment banking and how to figure out which one is right for you.
What Is Private Equity?
Private equity (PE) is money controlled by a private equity firm. Firms invest these funds in private companies or companies not publicly traded on stock exchanges.
“PE firms typically raise capital from institutional investors, such as pension funds, endowments, and high-net-worth individuals, to form investment funds,” says Ryan Niddel, CEO at MIT45.
Some firms focus on venture capital investments, investing in early-stage or start-up companies. Other firms may perform buyouts in which they purchase a private company outright or make growth equity investments into established and expanding businesses. When choosing where to invest, private equity firms usually specialize in a particular industry or sector, such as health care or real estate.
“Private equity firms often take an active role in managing the companies they invest in, implementing operational improvements, strategic changes, and cost optimizations to enhance profitability,” says Niddel.
>>MORE: Learn more about private equity.
How Do Private Equity Firms Make Money?
Private equity firms typically employ a few key investment strategies to generate revenue. Their goal is to buy or invest in a company, grow it, then sell it.
Leveraged buyouts happen when PE firms use a combination of equity and significant debt to acquire companies. Growth equity is when PE firms invest in established but growing companies, typically taking a minority stake.
To grow a company, a PE firm might:
- Help companies scale their operations
- Provide strategic guidance
- Guide multiple expansions (selling the company at a higher valuation)
- Access additional capital markets
Once PE firms have helped a company grow, they can use a few exit strategies to realize returns, including:
- Initial Public Offering (IPO)
- Strategic sale to another company
- Secondary sale to another private equity firm
- Management buyout
Careers in Private Equity
The starting point for most people in private equity is as an analyst. Analysts (sometimes called junior associates) review data, create financial models, and present research findings to higher-ups. For example, an analyst might conduct market research to identify potential target companies to invest in, or they might analyze current portfolio companies and see how performance could be improved.
Analysts can then progress into senior associate positions and eventually become partners. Partners are the faces of PE firms, so they need to build strong relationships with clients and handle complex negotiations. A partner usually needs to invest their own funds into the firm, too.
Private Equity Work Environment
Work environments in private equity tend to be highly competitive and intensive, but can offer more work-life balance than investment banking companies as the work is more predictable and structured. Private equity also can be less travel-intensive than investment banking.
Analysts tend to work on smaller teams in more focused and strategic environments, with emphasis on creating long-term value for the company.
H2 Ventures Venture Capital
Learn how to value start-ups and analyze investments with this free job simulation.
Avg. Time: 5 to 6 hours
Skills you’ll build: Opportunity analysis, investment lifecycle, financial modeling, comparable company analysis, forecasting
What Is Investment Banking?
Investment banking is an area of financial services that raises money (or capital) for corporations, institutions, and governments. Raising money for such large entities typically involves complex transactions, and investment banks facilitate these capital exchanges.
An investment bank’s main role is to be an “intermediary between issuers of securities (such as stocks and bonds) and investors, facilitating capital raising, mergers and acquisitions, and other financial transactions,” says Niddel.
Investment banking companies also help private companies go public through initial public offerings (IPOs) and perform research to inform the bank’s and its clients’ investing decisions.
Additionally, “investment bankers assist companies in issuing securities to raise capital from investors, both in the public markets (initial public offerings, bond offerings) and private markets (private placements),” adds Niddel.
>>MORE: Learn more about investment banking.
How Do Investment Banking Companies Make Money?
Investment banks make money through various channels, from underwriting to research services.
Underwriting Services
Investment banks help companies issue new securities by acting as an intermediary between the company and potential investors.
They earn substantial fees by:
- Guaranteeing the sale of stocks or bonds, which reduces financial risk for the issuing company
- Providing expert guidance on pricing and structuring new securities offerings
- Managing the complex process of bringing new financial instruments to market
- Taking a percentage fee based on the total value of securities issued
Mergers and Acquisitions
Investment banks play a key role in corporate transactions like mergers and acquisitions. They may help a company identify a potential merger or acquisition target, help them conduct comprehensive valuations and due diligence on potential business combinations, or structure the deals to help maximize value and minimize risk.
These services don’t come for free — investment banks earn substantial advisory fees that can reach tens of millions of dollars per transaction.
Sales and Trading
In addition to mergers and acquisitions transactions, investment banks can help facilitate large-scale securities transactions for their clients. They may charge for services like:
- Providing liquidity and maintaining an inventory of securities
- Giving research and market insights to support trading decisions
- Managing risk through sophisticated trading strategies and portfolio management
Research Services
Finally, investment banks make money by providing actionable research insights to investors. For example, they may analyze financial statements, industry trends, and economic indicators to generate reports that help their clients make more informed investment decisions.
Careers in Investment Banking
Investment bankers follow a similar career path as PE professionals: they begin as interns, progress into analyst roles, and work their way up to associate positions. As interns and analysts, bankers handle a lot of research and present their findings to higher-ups — the analyst’s job is to support those above them and help them win clients. As associates gain more independence and responsibility, they may start direct interactions with clients.
Investment bankers can eventually become managing directors (MDs) in charge of a team of analysts and associates. MDs are also responsible for maintaining strong relationships with clients.
Investment Banking Work Environment
Investment banking’s reputation of long hours and high-stress work environments is unfortunately true. Professionals in this industry often have long and unpredictable working hours and extremely high-pressure work settings — where high stakes and fast paced-decisions are the status quo.
Analysts tend to work in large team structures where you might be a bit farther from the action (compared to private equity). You also may be required to travel significantly for client meetings.
Private Equity vs. Investment Banking: Which One Is Right for Me? Quiz
Now that you know a bit more about the differences between private equity and investment banking, which role is right for you? We’ve created a quick, fun quiz to help you decide. It’s completely free — you’ll just need to sign up to get your results.
Salaries: Private Equity vs. Investment Banking
Careers in finance are often lucrative, and investment banking and private equity are no different! According to the U.S. Bureau of Labor Statistics, financial and investment analysts have an average annual salary of $112,950. However, “financial analyst” is a broad title and can include many other careers outside investment banking and private equity.
Ultimately, an analyst in either industry will likely see salaries in the six-figure range. For example, entry-level analysts at Goldman Sachs reportedly make $110,000 for base salary, on top of other forms of compensation like commission, performance bonuses, and stock options. How much someone can make at a private equity firm or investment bank depends heavily on the company, location, and experience level.
Based on estimates from Glassdoor, private equity analysts have an average salary of around $182,000. On the other hand, Glassdoor estimates investment banking analyst salaries to be around $247,000 per year.
What’s the difference? Investment banking analysts tend to earn more than private equity analysts. So, in entry-level roles, you might see higher salaries in investment banking. However, PE firms tend to offer a share in profits as part of compensation, especially as you get more senior. This means that while private equity analysts may start at lower salaries, the ceiling for private equity salaries can end up being much higher.
>>MORE: Check out some of the highest-paying careers in finance.
How to Get Into Investment Banking vs. Private Equity
Education and Background
You need at least a bachelor’s degree to get into private equity or investment banking. A degree in finance, economics, accounting, or business can build a foundation in the finance and business skills needed to succeed in either industry. However, different majors or coursework can be useful, too. For instance, courses in statistics or mathematics are great for learning the more complex data analysis skills used to build financial models.
A common pathway into private equity is through investment banking. Some associates seek roles in private equity rather than continuing down the investment banking path because the skills are transferable and private equity can offer new and exciting opportunities.
To progress in either space, most analysts and associates seek a master of business administration (MBA) degree. This can make them more marketable and help solidify crucial business and finance skills.
Certifications
The chartered financial analyst (CFA) designation is the most widely sought-after certification for private equity and investment banking professionals. Gaining a CFA charter shows employers you are knowledgeable in asset valuation, financial analysis, portfolio management, and investing methods.
Other certifications investment bankers may consider include:
- Certified management accountant (CMA): Displays strong skills in accounting, financial analysis, and financial management
- Certified public accountant (CPA): Shows high-level abilities in accounting and financial reporting
- Financial risk manager (FRM): Denotes skills in assessing and managing the financial risks inherent to investing
Private equity professionals can pursue certifications like:
- Chartered private equity professional (CPEP): Shows mastery of private equity concepts and finance skills
- Chartered investment and management accountant (CIMA): Denotes strong management accounting skills and the ability to manage and grow a business’s finances
- Certified financial planner (CFP): Displays high-level skills in advising investing and financial decisions
Showcase new skills
Build the confidence and practical skills that employers are looking for with Forage’s free job simulations.
Skills
Working in private equity or investment banking requires certain hard skills like:
- Using Excel to create financial models and analyze data
- Performing discounted cash flow (DCF) analysis
- Calculating compound annual growth rates (CAGRs)
- Comparing investment options using business valuation methods
However, both private equity and investment banking professionals need to be able to interact with clients professionally and effectively and use soft skills such as:
>>MORE: Learn the skills financial institutions are looking for with Forage’s Investment Banking Career Path.
Bottom Line: What’s the Difference?
The key difference between investment banking and private equity is that private equity deals exclusively with private companies. On the other hand, investment banking can involve publicly traded corporations, government entities, and large institutions.
However, these two careers have considerable overlap regarding the day-to-day work handled by analysts and associates. You can apply the same skills used in investment banking to private equity. In fact, many investment bankers transition to private equity during their careers. However, in private equity, professionals often take a hands-on role in the companies the firm invests in, while investment bankers act as intermediaries, facilitating large financial transactions.
“Private equity may suit individuals with a strong operational and strategic mindset, while investment banking may be appealing for those interested in financial analysis, deal-making, and capital markets,” advises Niddel.
Think a career in finance is right for you? Explore your options and learn the skills you need to get hired with Forage’s free job simulations.
Image credit: Canva
