Private Equity vs. Investment Banking (2024)

Private equity vs investment banking is one of the main questions being asked by anyone looking to enter the world of finance. You’re probably wondering about the difference between private equity and investment banking. Both industries offer challenging and lucrative careers. Each is prestigious and a great way to launch a business career. But they each offer their own unique set of risks and rewards. So, which one is right for you? Ultimately, the decision comes down to what you value most in a career, as well as your natural skill sets and abilities. Let’s examine what distinguishes these two fields.

What’s The Difference Between Private Equity & Investment Banking?

Let’s start by defining the terms. Private equity is a career path, yes. But it’s also fundamentally a type of financing that is typically used by companies that are not publicly traded. This can be done through venture capital firms, angel investors, or other private investors. So, when we say we want to “work in private equity” it means we want to work for a venture capital or investment firm that is investing its own private equity into businesses that are not publicly traded.

Investment banking, on the other hand, is the business of providing financial services to governments, corporations, and other institutions. This can include activities such as underwriting equity, issuing loans, and managing mergers and acquisitions. Oftentimes, it involves helping private companies issue equity to become publicly traded companies in an Initial Public Offering (IPO).

Private equity firms tend to be much more hands-on than investment banks. This is because they typically have their own money tied up as an investment in a company. Investment banks, for the most part, are providing a financial service for which they are getting paid. You’ll learn a lot about how businesses operate and make money at both types of firms. However, at a private equity firm, depending on your role, you will achieve a greater level of operational understanding. However, if your true passion is for viewing businesses through the lens of investments and finance, then investment banking may be better for you. Investment banks must have a deep understanding of a business’ cash flows, risk profile, and underlying value when they help a company raise money by issuing debt or equity.

Ultimately, the revenue model is fundamentally different between both fields. Investment banks get paid on a deal, so the organization is incentivized to recommend a transaction even if the client may have other options. In private equity, you’re not paid until the investment achieves a return – meaning that you spend much more time examining the “why” behind a potential deal to determine if your investment thesis is sound. Therefore, in private equity, you’ll spend much more time meeting with the founders and leadership teams of your targets – AKA you’ll do more work “outside of the spreadsheet.” In investment banking, you’re often trying to get the client to “yes,” while in private equity, saying “no” to a deal happens much more often.

In conceptualizing private equity vs investment banking, it’s helpful to know which skill sets are necessary to succeed in each field. If you’re good with numbers and enjoy working on complex financial transactions, investment banking may be a good fit. If you’re more interested in the operational aspects of business, private equity could be the right choice. Ultimately, it’s up to you to decide which path is best for your future.

A Day in the Life

Let’s look at a day in the life of workers in each field.

Day in the Life of an Investment Banker

The life of an investment banker is one of long hours and high stress. But it can also be exhilarating, exciting, and extremely lucrative. If you’re up for the challenge, here’s what you can expect for a day in the life of an investment banker:

You’ll start your day early, around 6 or 7am. After a quick breakfast, you’ll head to the office and prepare for meetings with clients. Investment banking is all about relationships, so you’ll be spending a lot of time on the phone and in face-to-face meetings. You’ll need to be able to think on your feet and come up with creative solutions to problems.

Around noon, you’ll take a break for lunch. This is usually a quick meal taken at your desk while you continue working. In the afternoon, you’ll continue working with clients and prospecting for new business. The days are long, but they can be very rewarding. At the end of the day, you’ll often have drinks or dinner with clients or potential clients. This is a great way to build relationships and solidify deals. If your role at the firm is more of an analyst rather than an associate (i.e., pre-MBA instead of post MBA), then substitute lots of time spent building complex financial models for extended interaction with clients. Associates discuss the assumptions and alternatives with clients, and then the analysts turn that guidance into a financial model that determines the value of the company’s debt or equity.

If you’re considering a career in investment banking, be prepared for long hours and lots of hard work. But if you’re up for the challenge, it can be an extremely rewarding experience.

Private Equity Day in the Life

As a private equity associate, you’ll be working with some of the most powerful and influential people in the financial world. You’ll be responsible for conducting due diligence on potential investments, negotiating deals, and overseeing the performance of portfolio companies. It’s a demanding job that requires long hours and a lot of travel, but it can also be extremely rewarding. Private equity associates typically work on a project basis, which means they’re always dealing with new challenges. And because private equity firms are often located in major cities like New York, London, and Hong Kong, you’ll have the opportunity to live and work in some of the most vibrant and exciting places in the world. Thus, a private equity day in the life is highly variable. If you’re looking for an exciting and fast-paced career, private equity is worth considering. As with investment banking, analysts tend to spend a lot of time building financial models, but perhaps less so than in investment banking.

Skills Required for Investment Banking & Private Equity

Let’s take a closer look at the skillsets demanded of investment bankers and private equity associates.

Investment Banking Skills

As for the skills needed for investment banking, perhaps most important is the ability to think on your feet and make quick decisions. Investment bankers also need to be able to build strong relationships with clients and deal with difficult situations calmly and confidently. In addition, they must be highly analytical, have excellent mathematical skills, and be able to understand complex financial concepts. Finally, especially for analysts, excel modeling skills are critical. These are some of the most important investment banking skills you should focus on building if you are interested in breaking into this highly competitive field.

Private Equity Skills

As for private equity skills, professionals in this field similarly need to be highly analytical and have excellent mathematical skills. At the same time, they have a knack for quickly understanding the drivers of competitive advantage in an industry and why a company’s business model is attractive or not. In addition, they need to have a deep understanding of the financial markets and be able to identify trends and opportunities. They also need to be able to negotiate deals effectively and build strong relationships with limited partners.

Private Equity Vs Investment Banking Compensation

Here are ranges for private equity vs investment banking compensation.

Private equity compensation:

• $275k to 390k at top firms

Investment banking compensation:

• $240,000 to $270,000 (1st year)
• $275,000 to $390,000 (2nd year)
• $320,000 to $450,000 (3rd year)

Common Questions About Investment Banking & Private Equity

We receive many questions around investment banking and private equity. Here are some of the most common, along with our perspective on each.

1. Which is better: private equity or investment banking?

Investment banking is all about providing capital to companies who need it. Private equity, on the other hand, is about buying companies and then growing them. So, if you’re interested in finance and deal-making, investment banking is the way to go. If you’re more interested in strategy and operations, private equity might be a better fit.

2. Is private equity more prestigious than investment banking?

This depends on your perspective. Private equity tends to be more exclusive and less well-known than investment banking. On the other hand, investment bankers are often seen as the power players on Wall Street. Ultimately, it comes down to which field you are more interested in and which one better suits your skillset.

3. Is private equity less hours than investment banking?

As for hours, both private equity and investment banking can be demanding careers. However, investment bankers tend to work longer hours, often working late into the night and on weekends. Private equity firms also tend to have a more relaxed work environment and offer more flexible hours. So, if you’re looking for a career with less hours commitment, private equity may be the way to go.

4. Why does private equity pay so much?

There are a few reasons. First, private equity firms tend to be much smaller than banks, so there’s less room for advancement. Second, private equity firms are typically performance-based, so the better you do, the more money you’ll make. And finally, private equity firms usually invest alongside other people’s money, so when businesses they buy perform well, they earn a return for themselves alongside the fees earned for managing other people’s money.

5. Is an MBA necessary for private equity or investment banking?

It depends. If you want to work in investment banking, you’ll almost certainly need an MBA (or equivalent experience) to progress. But at the analyst level, you don’t need an MBA. If you’re interested in private equity, an MBA is not necessarily required – though it will give you a leg up in the hiring process, particularly for more senior roles.

Conclusion

Private Equity vs Investment Banking is a worthwhile question to be asking if you’re interested in a finance-focused career. By knowing your natural private equity skills and investment banking skills, as well as lifestyle expectations, you can make an informed decision as to whether private equity or investment banking is right for you. If a private equity day in the life speaks to you more than the day in the life of an investment banker, trust that gut instinct!

Additional Resources

• Investment Banking Interview Questions
• Consulting Resume: Complete Guide