Investment Banking vs Private Equity- There is a huge difference between investment banking and private equity. We will bunk the myths here and will try to see from different angles how they are different from each other. Many people often think that there is not much difference between investment banking and private equity as they both deal with raising capital for investing purposes, but they are entirely different if you give a closer look. Investment banking is all about finding businesses and looking for ways for raising capital from the capital market. Whereas, private equity is all about finding high net worth funds and then finding investment opportunities in other businesses. It seems like that both are coming from opposite direction to reach the same goal.
We will dig deep and see in detail how these two different career paths ultimately impacted a lot of young professionals in a meaningful way. We will talk about industries, conceptual roles, what sort of cultures or lifestyles they offer, honorarium and various skill sets required to thrive in these paths.
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Investment Banking vs Private Equity – Overview
Think like this.
A is a private equity firm. And B is an investment banking firm.
Most of the people who have little or no sense about this domain would equate the two as similar; but there is a significant difference. Firm A is a collected pool of investors who come together to invest in worthy businesses. How would they do it? They would use their personal funds, pension funds, collect money from insurance companies and wealthy individuals and will invest that lump-sum money in the businesses that they think would generate greater return on investments for them.
Now, firm B is completely different. What firm B does is a service of capital-raising for businesses. Firm B advises clients on different transactions like mergers and acquisitions, asset allocation, restructuring and any service that facilitates capital-raising for its clients.
So what is the basic industry difference between firm A and firm B? The basic difference is firm A is an investment business; whereas firm B is a capital-raising services. Thus private equity is a lot different than investment banking. In investment banking, you don’t need to invest anything at your risk; your job as investment banker is to facilitate and offer consulting services. But in private equity firm, your job is to invest, not to advise. These two paths often intersect and often the investment banker needs to pitch out ideas to convince the client to do the deal, but both are different industry and different pathways.
Investment Banking vs Private Equity – Profile
As we already mentioned both of these things are different, let’s look at what tasks you need to perform if you need to be part of each of these pathways.
Let’s talk about investment banking first. In a typical scenario, an investment banking analyst has to perform these primary tasks – pitch book creation, modelling and administrative work. A pitch-book simply 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. Other than that you need to handle multiple deals at the same time. How would you do that? You will simply prepare the merger (or any other) model for multiple deals and will look for errors and bugs because on the basis of your preparation of the models, the decisions would be taken. You need to be aware of all scenarios and for that you need to be able to handle sensitivity analysis at different levels. As an investment banker your administrative tasks would be little or not much, but you need to tweak few things here and there to be able to concentration on two main things – pitch-book presentation and modelling on which the major decisions are being made.
Talking about private equity, there are basically four functions which private equity associates have to perform on a daily basis. They are – fundraising, screening for and making investments, managing investments and portfolio companies and exit strategy. Fundraising is typically done by senior professionals but often associates are asked to help with the presentation. All they need to do is to find out the past performance, past investors and what strategy was being used for the funds. Often associates need to do credit analysis on the fund itself. Screening is very important part of private equity. Associates take pivotal roles in this regard. They look at all the investment opportunities and use financial models (like Discounted Cash Flows, Net Present Value Method etc.) to understand whether investing in these projects are profitable or not. There is a significant difference in creating models for private equity associates and the investment bankers. Private equity associates do it to get to the thick and thin of the things; whereas, investment bankers build models to impress the clients. While managing investments and portfolio companies, associates help to turn around operations and try to increase operational efficiency (EBITDA, ROE etc.). They also work on the exit strategy and this needs in-depth analysis. In a go, private equity associates have to be equipped with all the tools, valuation techniques and finance knowledge to be able to crack the code for their investment portfolio and for their clients.
Investment Banking vs Private Equity – Work Culture
If you are looking for work-life balance then it is better that you choose any other profession than investment banking. Investment banking is certainly not for those who want to work 8 hours a day. If you are ready to come at office at 9 a.m. in the morning and leave at 2 a.m. at night for most of the days, then you can choose investment banking. It is a very high-pressured job and people need to put their heart and soul into the deals to be able to fetch them in. Of course, there are two major benefits for working 16-20 hours a day.
First of all there is no limit on how much you can earn. You can earn as much as you want and you would also get bonus for each deal along with the salary.
Secondly, you will always get opportunity to know the best people in the business. Knowing them will help you crack more deals and become the centre of attraction in the business world. But while discussing these two major benefits, most people don’t talk about one of the major things investment bankers often talk about. And it is friendship. If you ask any investment banker, he would tell you that after school or college, their best friends are their colleagues with whom they cram all night to fetch a major deal. And we think that’s one of the major benefits of this high-pressured job.
Private equity associates spend saner life than investment banking analysts. If things don’t go wrong (they don’t always), private equity associates spend around 8-12 hours a day in the office. Normally weekends are for them to enjoy with their personal hobbies or with family. That means if you are a private equity associate, you have much better work life balance than an investment banker. Yes, sometimes you need to work in weekends but that is not as much as an investment bankers needs to do. Usually, the team is small (around 10-15) and you have the opportunity to discuss various matters with people who are senior to you.
The environment at office is kind of cube environment where everyone needs to work on a common goal to achieve the desired result. In private equity firm, associates have more impact on sales and trading as they are closer in taking action and investing; whereas the investment bankers have less impact on the sales and trading of business.
In a sense, private equity associates enjoy better work life balance than any investment banker.
Investment Banking vs Private Equity – Compensation
If you compare the compensation for both the profession, surprisingly you would see that investment banking professional earns lesser than private equity associates. It is strange, but the reason private equity associates earn so much is because usually most private equity associates join private equity firm after being investment bankers for some time. So you can say that whatever hard work they already did in their career in the past, they are getting the benefit now as private equity associates.
Let’s look at the compensation of each of the pathways.
As an investment banker if you join right now, you would get around US $130-$140k per annum in your first year. In the second year, you would get around US $155=$165k per annum. In the second year, the increment is visible, but not as much as expected. In third year, you can expect around US $175-$195k per annum. The above statistics are for investment banking analysts. But if you join as investment banking associate, your earning would be much more in the first year only than the compensation of investment banking analyst in the first year. Your compensation as investment banking associate would be around US $150-$185k per annum.
As private equity associates your compensation is significantly more, but in firms which are just starting out, they don’t pay as much as the reputed private equity firms. In the first year, as an associate you would be able to get around US $100k-$220k per annum. In the second year, you would get around US $120k-$250k per annum. And in the third year, as an associate, you would be able to get around US $150k-$300k per annum.
Career Pros and cons
There are many pros and cons for both of these pathways. We will discuss them here so that you can get an idea what to pick and what to let go of.
- It is a job which prepares you for bigger opportunities and makes you the centre of the business wherever you go.
- It teaches you the beauty of hard-work and how one thing focus can yield extra-ordinary results.
- It offers you extra-ordinary money. You will not only get the salary very few can earn in two-three years, you will also earn bonus which is quite hefty as well.
- You will be able to create a network that most influential people won’t have. And in this complex scenario of business, you know the value of a high-value network.
- You will create extra-ordinary friendship with your colleagues with whom you will cram all days and nights to fetch deal after deal. Most people don’t see as a benefit, but if you meet any investment banker ask him about it.
- Investment banking career is not for the faint-hearted. You need to work at least 16 hours a day and even on the weekend. There won’t be any work-life balance and if you don’t know how to keep yourself sane, your health may get affected.
- Investment banking career is more about business deal than going to the in-depth analysis of the models. Investment banker wants to convince the clients with building models, not to go to the depth of any modelling.
- Investment banking comes down to mainly two things which are not always under control – pitch-book presentation and model building. These both things are under the direct control of the clients and the investment bankers use the inputs after thinking over what clients want versus what they can build.
- If you want to be part of a great team and would like to facilitate in making businesses shine, you would be part of a private equity team. On the surface it may seem that it is easy to achieve, but you need to understand that if you would like to be an associate in a private equity firm, you need to know a lot more than an investment banker.
- Even if you need to go for in-depth analysis, your work life balance would not be an issue. If something doesn’t go wrong, you will be able to enjoy your weekends and you need to work simply 10 hours a day.
- In the monetary sense also, being a private equity associate is beneficial. You will be paid handsomely at the end of the day.
- There is not much disadvantage in being a private equity associate. The only thing is that you need to know a lot more as you need to build models to go to the depth of things as you are on the buy-side of the business. Albeit you can’t call it a cons.
- You will not get as much limelight as you get in the investment banking industry.
Why Pursue Investment Banking or Private Equity?
Investment banking is all about getting the limelight and being the centre of attraction. If you are more interested in business selling, you should pick investment banking after doing an MBA from a reputed university.
Private equity is more about passion as it is more in-house than going out and stealing the deals. If you love to do analysis in-depth and love investment, you should go for this. But remember most of the people who come in this private equity business comes after pursuing their career in investment banking.