Investment Banking vs. Private Equity: Differences in Financial Modeling?
Because private equity associates are frequently ex-investment bankers, much of the modeling and valuation analysis required in a PE shop is familiar to them.
That said, the level of detail in investment banking pitch books vs. PE analysis varies widely.
Ex-bankers frequently find that the huge investment banking models they are used to working on are replaced by more targeted, back-of-the-envelope analysis in the screening process, but the diligence process is a lot more thorough.
While investment bankers build models to impress clients to win advisory business, PE firms build models to confirm an investment thesis.
One cynical argument to explain this difference is that while investment bankers build models to impress clients to win advisory business, PE firms build models to confirm an investment thesis where they’ve got some serious skin in the game.
As a result, all the “bells and whistles” are taken out of the models, with a much bigger focus on the operations of the businesses being acquired.
When deals are underway, associates will also work with lenders and the investment bank advising them to negotiate the financing.
Investment Banking vs. Private Equity: Differences in Culture?
Lifestyle is one of the areas where PE is just clearly better. Investment banking is not for those looking for a great work-life balance.
Getting out at 8-9 pm is considered a blessing. Also, investment banking is not an environment with “hand-holding” as you must be able to run with projects even when little direction is provided.
In private equity, you’ll work hard, but the hours are not nearly as bad. Generally, the lifestyle is comparable to banking when there is an active deal, but otherwise much more relaxed.
That said, there is some upside other than money and career prospects. You will definitely develop close friendships with your peers because you are all in the trenches together.
Many analysts and associates will tell you that some of their closest friends after college/business school are their investment banking peers that they grew close with while working such long hours.
In private equity, you’ll work hard, but the hours are not nearly as bad.
Note: The culture in private equity is truly firm-specific, so research the firm’s reputation before committing.
Investment Banking vs. Private Equity: Differences in Lifestyle?
Typically, the lifestyle is comparable to banking when there is an active deal, but otherwise much more relaxed. You usually get into the office around 9am and may leave between 7pm-9pm depending on what you’re working on.
You may work some weekends (or part of a weekend) depending on if you are on an active deal, but on average, weekends are your own personal time.
There are certain PE shops that have taken a “Google” approach and offer free food, toys in the office, televisions in offices, and sometimes even beer in the fridge or a keg in the office. Other PE firms are run more like traditional, conservative corporations where you are in a cube environment.
PE firms tend to be smaller in nature (there are exceptions), so your entire fund may be only 15 people. As an Associate, you will have interaction with everyone, including the most senior partners.
Unlike at many of the bulge bracket investment banks, senior management will know your name and what you are working on.
In addition, private equity is a bit closer to sales & trading in the sense that there is a culture of performance. In banking, analysts and associates have virtually no impact on whether a deal closes or not, while PE associates are a little closer to the action.
Many PE associates feel like they are directly contributing to the fund’s performance.
That feeling is almost completely absent from banking. PE associates know that a large part of their compensation is a function of how well these investments do, and have a vested interest in focusing on how to extract the maximum value from all portfolio companies.
Investment Banking vs. Private Equity: Higher Compensation?
An investment banker typically has two salary parts:
- Base Salary
- Bonus
The majority of the money that a banker makes comes from a bonus, and the bonus increases drastically as you move up the hierarchy. The bonus component is a function of both individual performance and group/firm performance.
Compensation in the private equity industry is not as well-defined as in the investment banking world.
PE associates’ compensation typically includes base and bonuses like investment bankers’ compensation.
The base pay is usually on par with investment banking. Like banking, the bonus is a function of individual performance and fund performance, frequently with a higher weighting on fund performance.
PE associates seldom receive carry, which is a portion of the actual return the fund generates on investments and the largest portion of the partners’ compensation.
Investment Banking vs. Private Equity: Pros and Cons?
Inevitably, someone will ask for a bottom line – “which industry is better?” Unfortunately, It’s not possible to say in absolute terms whether investment banking or private equity is the “better” profession. It depends on the type of work that you ultimately want to do and the lifestyle/culture and compensation that you desire.
However, for those lacking a clear vision of what to do in the long term, investment banking puts you at the center of the capital markets and provides exposure to broader types of financial transactions (there’s a caveat – the breadth of exposure actually depends on your group). Exit opportunities for investment bankers range from private equity, hedge funds, corporate development, business schools, and start-ups.
If you know that you want to work on the buy side, however, there are very few opportunities more enticing than private equity.
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