Investment Banking vs. Private Equity
Private equity tends to be a common exit path for investment banking analysts and consultants. As a result, we get a lot of questions on both the functional and the actual day-to-day differences between investment banking analyst/associate and private equity associate roles, so we figured we’d lay it out here.
We’ll compare the industry, roles, culture/lifestyle, compensation, and skills to compare and contrast both careers in detail accurately.
Investment Banking vs. Private Equity: What is the Difference?
Put plainly, investment banking is an advisory/capital raising service, while private equity is an investment business. An investment bank advises clients on transactions like mergers and acquisitions, restructuring, as well as facilitating capital-raising.
Private equity firms, on the other hand, are groups of investors that use collected pools of capital from wealthy individuals, pension funds, insurance companies, endowments, etc. to invest in businesses. Private equity funds make money from a) convincing capital holders to give them large pools of money and charging a % on these pools, and b) generating returns on their investments. In short, PE investors are investors, not advisors.
The two business models do intersect. Investment banks (often through a dedicated group within the bank focused on financial sponsors) will pitch buyout ideas with the aim of convincing a PE shop to pursue a deal. Additionally, a full-service investment bank will seek to provide financing for PE deals.
Learn More → Investment Banking Guide
Investment Banking vs. Private Equity: Hours and Workload Comparison
The entry-level investment banking analyst/associate has three primary tasks: pitch book creation, modeling, and administrative work.
In contrast, there is less standardization in private equity – various funds will engage their associates in different ways, but there are several functions that are fairly common, and private equity associates will participate in all these functions to some extent.
Those functions can be boiled down into four different areas:
- Screening for and making investments
- Managing investments and portfolio companies
- Exit strategy
Typically handled by the most senior private equity professionals, but associates may be asked to help out with this process by putting together presentations that illustrate the fund’s past performance, strategy, and past investors. Other analyses may include credit analysis on the fund itself.
Screening and Making Investments
Associates often play a large role in screening for investment opportunities. The Associate puts together various financial models and identifies key investment rationale for senior management regarding why the fund should invest capital in such investments. Analysis may also include how the investment may complement other portfolio companies that the PE fund owns.
Banking Models vs. Private Equity Models
Because associates are often 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 of investment banking pitch books vs PE analysis varies widely.
Ex-bankers often 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.
Managing Investments and Portfolio Companies
Often managed by a dedicated operations team. Associates (especially those with management consulting experience) may assist the team in helping portfolio companies revamp operations and increase operating efficiency (EBITDA margins, ROE, cost-cutting).
How much interaction an Associate gets with this process purely depends on the fund and the fund’s strategy. There are also some funds that have Associates dedicated to just this part of the deal process.
Involves both the junior team (including associates) and senior management. Specifically, associates screen for potential buyers, and build analyses to compare exit strategies Again, this process is modeling-heavy and requires in-depth analysis.
I have gone through the blog post and I must admit it is very informative. I liked the writing style too. Keep up the good work and share more contents. Cheers!