Difference Between Private Equity and Investment Banking

Edited by Diffzy | Updated on: September 15, 2022

       

Difference Between Private Equity and Investment Banking Difference Between Private Equity and Investment Banking

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Introduction

Private equity is a way to dig into the business model. Private equity employees tend to be in one sector.

Many people switch from private equity to investment banking, as many parts of both worlds are very similar. But there is a difference. Investment banking is extremely execution-oriented. When you work in investment banking you will be very client-facing (client-focused work).

Barclays Capital and Citi Bank are some of the most important investment banks around the globe. J.P Morgan, Credit Suisse, J.P Morgan, Citi Bank, J.P Morgan, J.P Morgan and J.P Morgan are just a few examples.

Private Equity vs Investment Banking

The main difference between Private Equity and Investment Banking is that Investment Banking mainly acts as a consulting and advisory firm whereas Private Equity acts as a profit-making firm in the field of investment.

Private equity can be described as the process of raising capital and investing it in companies to improve their performance and earn a good return.

Investment banking acts as the engine room for the economy. It was primarily concerned with the creation of capital for companies and the government.

Difference Between Private Equity and Investment Banking in Tabular Form

Table: Private Equity vs Investment Banking
Parameter for Comparison
Private Equity
Investment Banking
Implication
Although it may be difficult to feel optimistic about the long-term prospects of private equity, it is possible. Low funds will make it difficult for private equity firms to perform in the future.
The IT boom has led to changes in the basic procedures for funding growth companies. This has raised questions about what the future holds for investment banking.
Importance
Private equity firms can be described as investment management companies.
The investment banks can also be a link between the investors and the company.
 
They assist growing companies in raising funds and helping individuals to start new businesses.
Investment banking offers a higher return rate than savings accounts.
Main features
Private Equity does not allow early withdrawal. It acts as an LP ( Limited Partner).
Investment Banking
* Debt finance
* Equity Finance
* Derivates
Histories
People started to take an interest in making money by selling or buying property for profit after World War II. This led to modern private equity.
SBI, India's largest government bank, entered this industry in mid-1970. By 1980, more than 29 banks had been established in this sector.
Advantages
* Cash Infusion is the biggest benefit of private equity.
* High returns are possible if investors have the right knowledge.
* An investor in Investment Banks can forecast the amount of money that he will receive in the future.
* The fluctuations in the asset's price are often very small.

What is Private Equity?

Private equity can be described as the process of raising capital by one or more individuals and then investing that money in companies to improve their performance and earn a good return.

Private Equity cannot predict the future. It is subject to fluctuations and therefore, it can be volatile.

These are some of the benefits of investing in private equity over Listed Equity.

Private Equity

  1. Low liquidity
  2. Long investment horizon
  3. Active participation is high
  4. Low market efficiency
  5. There is no published information
  6. Low regulation oversight

Listed Equity

  1. Strong liquidity
  2. In short-term or long-term
  3. Very little active involvement
  4. Higher market efficiency
  5. Public information
  6. Highly controlled

Private Equity Funding is often sought by companies for the following reasons:

  1. To restructure ownership & management, buy out shareholders
  2. Increase working capital base
  3. Business Expansion & Development
  4. Create new products to grow/maintain competitive
  5. Acquisitions of other businesses finance

Private equity firms assist small businesses in raising funds to finance their projects. These firms assist new startups in raising capital for their projects and are repaid once the project generates income.

Sell-Side Versus Buy-Side

The sell-side of investment banking is when they sell investors the business interest. They are primarily clients of corporations and private companies. When a company wants to go public or is working through a merger-and-acquisition deal, it might solicit the help of an investment bank.

Private equity associates, on the other hand, work on both the buy-side and sell-side. Private equity associates purchase business interests for investors who have already invested the capital. Private equity firms may buy controlling stakes in businesses or be directly involved in managing decisions.

Regulative Challenges

The United States was the first country to separate commercial and investment banking. For the next 66 years, investment banking activities were totally separated from commercial banking activities like taking deposits or making loans. The Gramm-Leach-Bliley Act 1999 removed these barriers. Investment banks are still highly regulated, with the Dodd-Frank Act imposing restrictions on proprietary trading.

Hedge fund investing and private equity have historically been exempt from most regulations that affect banks and publicly traded companies. A light regulatory hand is justified because most private equity investors can manage their own affairs. Dodd-Frank however gave the SEC permission to expand its control over private capital. The very first private equity regulatory agency was established in 2012. The taxation and advising fees of private equity activity have been given special attention.

Analyse

Private equity analysis is more precise, abstract, and vague in its analysis of investment banking. This is partly due to the compliance risks that investment banks face. Too specific or too rosy of a picture could be misinterpreted as misleading.

One possible explanation could be that private equity associates are more likely to have "skin" in the game. Private equity analysts are often more critical and deeper because they have less patience with clients and their own capital.

Culture

The informal stories of private equity associate life seem to be more accepting and balanced than those in investment banking. Investment banking culture is reflected in the strict, tie-tied, high-stress corporate culture that is popularized on television and movies.

Private equity firms tend to be smaller and more selective in their selection of employees. Once a hire has been made, however, they are less concerned about maintaining performance. While there are overlaps and exceptions in every industry, private equity associates generally find the average day a little less stressful.

What is Investment Banking?

The field of investment banking helps companies, large and small, raise finance. Investment banking can also help with a wide range of transactions that a company might be involved in. Investment Banking's main role is to offer a lot of consulting. This expertise makes it easy for companies to raise finance from new sources or generate finance on their own.

Investment banking offers a higher rate of return than savings accounts. They monitor market trends and provide direction on when and how to make public offerings. Investment banks don't take initial deposits from customers like commercial banks.

These are the two main streams of business within this sector.

  1. Trade securities for cash or securities.
  2. Promotion of assets/securities

These are the top global investment banks that offer full-service.

  1. Bank of America
  2. Barclays Capital
  3. BNP Paribas 8
  4. Citigroup
  5. Credit Suisse
  6. Deutsche Bank
  7. JPMorgan Chase * Goldman Sachs

Now as we have discussed all the possible differences and details between Private Equity and Investment Banking, we will discuss the pros and cons in our articles. The section discusses all the possible pros and cons of both. Let’s dive deep down to know all about t.

The pros and cons of Private Equity and Investment Banking

Private Equity

Here are the Pros and Cons of private equity

Pros:

  • A private equity team is a great way to get involved in a team that helps businesses succeed. Although it seems easy, it's not. You need to know more than just an investment banker if you want to become an associate at a private equity company.
  • You can still have a good work-life balance, even if you are required to do an in-depth analysis. You will enjoy your weekends if nothing goes wrong.
  • Being a private equity associate can also be beneficial in a monetary sense. You will receive handsome compensation at the end.

Cons:

  • Being a private equity associate has few disadvantages
  • . You need to be able to understand more about the build-side of the business in order to create models that go into the details. It's not a problem, but you can't call this a con.
  • Investment banking will give you more attention than the investment banking industry.

Investment Banking

Here are the Pros and Cons of Investment banking

Pros:

  • This job prepares you to take on bigger roles and puts you at the heart of the business wherever it is.
  • It shows you how hard work can be beautiful and how focusing on one thing can lead to extraordinary results.
  • You will be able to earn extra money. Not only will you get a salary that few people can make in just two-three years but also a substantial bonus.
  • You'll be able to create a network that is more influential than most people. In this complicated business environment, you will understand the importance of a high-value network.
  • Your colleagues will be your best friends and you'll make lasting friendships. Although most people don't view this as a benefit to them, ask any investment banker about it.

Cons:

  • Investment banking is not for the faint-hearted. At least 16 hours per day is required, even at weekends. You won't find a work-life balance. If you don't know what to do, your health could be affected.
  • A career in investment banking
  • It's more about business deals than analyzing the models in depth. A banker who invests in clients wants to convince them to build models, and not go into the details of the modelling.
  • Two things are important in investment banking: pitch-book presentation and model building. Both are directly under the control of clients. Investment bankers then use inputs to help clients decide what they want and what they can build.

The Key Takeaways

  • Private equity firms and investment banks both play a role in placing shares of companies in the hands of investors and facilitating M&A transactions.
  • Investment banks are often positioned as middlemen, selling shares of publicly traded companies and other investors through a sell-side function.
  • Private equity firms on the other side invest in the buy-side in privately-owned companies.

Why pursue Private Equity or Investment Banking?

It's all about being in the spotlight and being the centre of attention when it comes to investment banking. After completing an MBA at a well-respected university, you can choose investment banking.

Private equity is about passion, as it's more in-house than going to the streets and taking the deals. This is the right career for you if you enjoy deep analysis and are passionate about investing. However, most people who enter private equity after working in investment banking are already successful.

Main Difference Between Private Equity and Investment Banking in points

  1. Private equity is different from investment banking in that they provide much more consulting than Private Banking.
  2. Private Banking cannot predict the future, but Investment Banking can.
  3. Private Equity is a business that operates in the investment sector. Investment banking assists in raising finance.
  4. Private Equity's most significant advantage is Cash Infusion. Private Equity is more advantageous than investment banking because it offers expertise in many transactions that a company might be involved in.
  5. Investment Banking does not require any prior money, such as a deposit, from its customers. Private equity, however, is a business that charges a set amount from its customers.

Conclusion

Many people and companies are having difficulty raising funds to expand their businesses or raise funds for new startups. Investment Banking assists its clients in raising funds by advising them on how to manage assets and when to make public offerings.

Private Equity is an investment business where people pool their money to purchase assets and then make a profit by selling them at a higher price. These are two methods that require a lot of money to generate profits.

References

  • https://www.hbs.edu/faculty/Pages/item.aspx?num=35877
  • https://www.aeaweb.org/articles?id=10.1257/jep.23.1.121
  • https://2ndave.nyu.edu/bitstream/2451/26535/2/FIN-01-006.pdf

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