Private Equity vs Investment Banking

Private equity (PE) and investment banking are well-known finance sectors that graduates go on to make a great career out of. Before trying to understand the differences between private equity and investment banking, it is important to understand their meanings. 

What is Private Equity? 

Private equity is the industry where capital investment is made into companies that are not publicly traded on the stock exchange. To make profits, PE firms will conduct extensive research looking for private companies with great exponential potential that they’ll buy or invest in to increase their value. To meet this objective, PE firms will provide the resources necessary to help the target companies grow, develop new products and restructure. A PE firm may choose to keep the acquired firm for a long time if it feels like not selling. In this way, they are similar to Venture Capital firms in the sense that they invest for the long term in startups to help them grow and then reap benefits after the companies go public or merge with other firms.

What is Investment Banking?

Investment banking is a special financial mechanism of banking operations related to the creation of capital for other companies, governments, and other entities. Investment banks are essentially consulting firms that provide advice on initial public offerings (IPOs), mergers, stock repurchases, and corporate refinancing. Investment banks act as intermediaries between security issuers and investors and help new firms to go public. They either buy all the available shares at a price estimated by their experts and resell them to the public or sell shares on behalf of the issuer and take a commission on each share.

Key Differences

Education 

To be a PE analyst a bachelor’s degree in finance, accounting, statistics, mathematics, economics or any other related analytical degree will suffice. The reason for the preference for these degrees is because PE fund management requires the technical ability to analyze financial performance and estimate the value of a private company (this will usually involve a lot of financial data). Sometimes an MBA may also be required. It has been said that the best MBA program to get into the PE industry is the Harvard Business School. 

The same applies to investment banking. A degree in finance, economics, accounting, or mathematics is a good start for any banking career. This may be all you need for many entry-level positions in this sector. A degree in physics or biology may also work – essentially, analytical degrees are good. Those interested in investment banking should also strongly consider pursuing a Master of Business Administration (MBA) or other professional qualifications like the Chartered Financial Analyst certification.

Skills

PE professionals will be comfortable with database tools like Bloomberg and modelling tools like Excel or Visual Basic. Furthermore, a PE professional will have attention to detail, interpersonal, communication, networking, negotiation and durability skills. The hours will be long; you’ll meet power shakers so you need to get along with them and the deals you recommend in the preliminary stage need to be excellent. Thus all of the aforementioned skills are very important to your success in the industry.

On the other hand, investment bankers should have an impressive knowledge of financial markets, investments, and company organization. Having excellent interpersonal skills will also serve you well as an investment banker. Other skills include communication skills (explaining concepts to clients or other departments) and the ability to take the initiative.

Compensation

Both private equity and investment banking are lucrative professions, but over time as their careers progress, we have found that private equity professionals earn more than their counterparts in investment banking. 

Investment banking is famous for its high pay and large signing bonuses. According to Glassdoor, a UK investment banking analyst (in their first year) makes a base pay of £55,563 and additional pay of £25,771; in total their pay will amount to £81,333 annually. Meanwhile, an analyst at a top private equity firm analyst in the UK may earn around £150,000 per annum. The basic salary would be £75,000 to £100,000 per annum and then the bonuses on top total around £56,000 to £102,000 per annum.

An investment banking associate’s – the next level after analyst – salary would be around $150-$185k per year. In the second and third years, this may be around $200-$250k per annum. A private equity associate would be able to get around $100k-$220k per annum. This increases to $120k-$250k per annum in the second year and $150k-$300k per annum in the third year.

Something else to note is that for both careers the pay package will depend on the firm. Private equity total compensation will vary widely because, on top of base salary, private equity analysts and associates receive bonuses that reflect closed deals and income generated from deals. Your pay as an investment banker will also vary depending on if the employing bank is a bulge bracket bank, middle-market bank, or boutique bank.

Work-Life Balance

Private equity is the clear winner here. Generally, in the private equity industry, reasonable working hours of 50-70 hours per week is the norm, with the occasional weekend work here and there (which is very rare). However, if you’re working on an active deal, late nights and weekend work are to be expected. Generally, private equity has a good work-life balance.

The same cannot be said for investment bankers as the most common complaint of investment bankers who have quit is that there is a total lack of work-life balance which leads to burnout. Work-life balance is almost impossible for investment bankers as they put in an average of 90-100 hours a week. Weekends are not even guaranteed to be without work. 

Thus if you are looking for a work-life balance between the two pick private equity or choose any profession that is not investment banking. However, if you like the idea of going into the office around 9 am and leaving around 2 am (when things get busy they get busy) then by all means run to investment banking.

Job Description

It is not unusual for PE analysts to have previously worked in an investment bank. A PE analyst’s role and duties will include: 

• Analysis of the economics of companies and potential deals, you’ll provide all the preliminary info necessary for the leadership to make an informed decision about a deal 
• coordinating the research and due diligence needed for a deal to take place
• Research new deals and investment areas
• Assist with preliminary fundraising 
• Screening of Confidential Information Memorandums (CIMs) to determine if certain opportunities fit the firm’s framework. After the screening, the analyst will provide a one or two-page summary for the senior employees. CIMs are documents provided by investment banks that contain information about potential investment opportunities.
• Prepare relevant documentation for partners

In a typical scenario, an investment banking analyst has to perform three primary tasks – pitchbook creation, modelling, and administrative work:

• Conduct preparation and review of materials used in the financing of clients, including investment memoranda, management presentations, and pitchbooks.
• A pitchbook means buy-side client presentation. As an analyst, you need to understand the market overview, and you also need to take care of the graphical representation of possible exchange ratios.
• Perform due diligence, research, analysis, and documentation of live transactions.
• Perform valuation, and develop financial models.

• Any other administrative tasks related to your work

Is Private Equity the Same as Investment Banking?

No, private equity is not the same as investment banking. Both jobs have similarities but clear distinctions in overall purpose. From our above definitions, there is a difference, simple but fundamental. Private equity concerns investing pooled funds (from high net worth funds) into businesses while investment banking is all about finding ways of raising investment/capital for various businesses. 

But I’m Still Confused Should I Choose Private Equity or Investment Banking?

Since the education for both careers is similar your answer will depend on other factors like the type of work that you desire, the compensation, work-life balance, and so on. In our findings – as we have said earlier – what people do is go into investment banking first and work for two years or more before they enter into private equity. For many, private equity is more prestigious than investment banking.

In conclusion, you should consider choosing private equity if you see yourself as an investor in the long term, and want to learn all aspects of the process and how to evaluate how a company delivers solid returns. Further, choose PE if the work-life balance is very important to you. If you plan on working closely with your company over an extended period choose PE as you will be in line to earn more money. 

Choose investment banking if you can sacrifice work-life balance and handle working for 90-100 hours a week. If you have good communication skills and are interested in doing financial modelling and valuations, closing deals, handling large transactions, and managing client relationships choose investment banking. And if you like the structured hierarchy, advancement process and career visibility that accompanies investment banking choose investment banking.

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Charles is a writer, practising lawyer and personal trainer who loves learning and developing himself. He graduated from Middlesex University, London with eight first-class grades in the second and third years of his law degree, and received a postgraduate offer from Cambridge University. He loves strength training, boxing and encouraging people to succeed in their pursuits (legal ones)
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