Buy-Side vs. Sell-Side

1. Buy-Side vs Sell-Side: Definition and Critical Distinction

Let’s look at the picture below to understand how corporations, Buy-Side firms and Sell-Side firms work together in the capital market. For the sake of simplicity, it’s just as easy as, basically, there are three parties being involved in the capital market. One party is a Corporation who wants to raise capitals by issuing securities. One party that has money and wants to make an investment into the corporation is called the Buy-Side.. The last one, who acts as the middleman between Buy-side and Corporation and advises on transactions between the two, is Sell-Side. 

Let’s dive deep into each of them. 

1.1 What is Buy-Side?

The investment strategy is easily understandable. These funds are called institutional investors, including a pool of individual investors or companies. They convince those investors to put money in their funds, then pour the money attracted into lucrative assets. Buy-Side firms make money on those assets. After a period of time, when a firm grows, an asset price soars up, Buy-Side firms sell them out at a premium to make billions of dollars, if not millions. 

1.2 What is Sell-Side?

The most typical representative of Sell-Side is Investment Banks. Investment Banks act as a middle-party to connect sellers with buyers in the capital markets by providing services to both sides (Sellers and Buyers).  In addition, other Sell-Side jobs are Equity Research, Sales & Trading, and etc.

2. Buy-Side vs Sell-Side: Working Progression, Salary, Working Hour, and Exit Opportunity

Having known about the definition of the two sides, you might wonder which career path is right for you?

Finance workers care much about their Career Promotion, Compensation and the Volume of working hours each week. Here’s what you need to know about the features of the two sides. 

At a junior level, such as Analyst and Associate, whichever side you are in, your income mostly comes from fixed monthly salary plus generous bonus at the end of a financial year. Both sides are famous for their compensations for employees right out of school. The most important thing here is what kind of nature of work you are interested in and what type of side you find yourself suitable for a long-term career?

There is a prevailing pathway for finance students that: First, you get an offer from an Investment Bank. After years of accumulating experience, you switch to more glamorous Buy-Side firms such as Private Equity, Hedge Fund and Venture Capital with a belief of more handsome remuneration, slightly better working hours and less bureaucracy-laden structures. 

Is that right?

2.1 Working Progression

At both Buy-side and Sell-Side firms, you will start off your career as an Analyst within two to three years depending on each firm, then get promoted to Associate and higher positions. 

Specifically, On the Sell-Side, you will start as an Investment Banking Analyst, the hierarchy will be like:

The ceiling level at most firms is Managing Director. Still, there are some firms having the Partner position. It’s no big deal. Whatever the title is, the roles rarely differ between firms.  

However, there’s one thing on the Sell-Side you might know. Sell-side firms like Investment Banks have a rigidly hierarchical structure. It takes 2-3 years to move up to Associate from Analyst, 3-4 years to Vice President. With exceptional performance, you can trim down the gap to get promoted, however, it’s almost fixed and you can’t do too much to progress quickly. That’s why after several years of working at Investment Banks, analysts and associates tend to switch to Buy-side jobs such as Private Equity and Hedge Fund where the advancement is more flexible and  their skills can be further exercised and honed. 

On the Buy-Side the hierarchy includes positions as follows:

At Private Equity, the structure largely resembles Investment Banking

At Hedge Funds and similar funds as Hedge funds like Mutual Funds, Asset Management Funds, there’s a little bit different because the highest level in the hierarchy is Portfolio Manager(PM). Below PM are Research Associate and Research Analyst. 

At Hedge Funds and different forms of asset managements, the hierarchy is leaner, with just a few people supporting the Portfolio Manager:

The advancement on the Buy-Side is largely based on your own performance. It means if you perform exceptionally, you could progress quickly and vice versa. 

2.2 Salary

In actuality, the salary is NOT quite much different between a Buy-Side role and a Sell-Side role at the junior levels. Buy-side firms, however, generally offer the higher ceiling relative to Sell-side firms. 

Let’s look at the table about the comparison between Investment Banking (representing Sell-Side) and Private Equity (representing Buy-Side), for reference purposes only. 

Source:  Heidrick & Struggles 2019 survey, Firm research 

Put those reference figures aside,  then no matter which side you are working for, you belong to the top 1% of earners in the finance industry.

2.3 Working Hour

2.4 Exit Opportunity

Investment Bankers will switch to Private Equity, Hedge Fund and Venture Capital as their exit opportunities. The vice versa, however, rarely happens.

You can hear a lot of people say that most bankers leave Investment Banks for glamorous Buy-Side roles at PE, HF. It’s common, but it’s also difficult. Buy-side firms provide a limited number of slots in the On-cycle program for bankers to pave the way for them to PE and HF. That results in a severe competition to get hired at those firms. 

For more details of career pathways after Investment Banking, you can see  Investment Banking Exit Opportunities here. 

3. Buy-Side vs Sell-Side: What Bankers and Portfolio Managers do

Since the jobs on the Sell-Side are more of deals and advisory and the ultimate goals are to arrive at recommendations to clients, the two main responsibilities of bankers include :

• Facilitate capital raisings including the issuance of debt and equity, private placements of capital
• Advise on strategic transactions including Mergers & Acquisitions, divestitures, strategic development, restructuring, and etc.  

Details of what they do would be like: deploy extensive knowledge to conduct financial modelling and valuation (for starter levels), build rapport to win new deals consecutively (for high levels), position the corporation to prospective investors (Buy-Side), draft marketing materials, form compelling investment thesis. In the nutshell, it’s underwriting, the process which an investment bank is responsible for offering the service all along – for example: from advising on the issuance of equity to identifying prospective buyers to buy stocks, shares)

On the Buy-Side, the jobs sound more active and managerial. Specifically, a Portfolio Manager (PM) are responsible for:

• Grow assets under management (AUM), if the return of a fund in a period of time falls below the hurdle rate, he/she wouldn’t receive incentive fees 
• Manage the client’s money and make investment decisions on behalf of clients
• Look for investors to recruit capital 
• Perform research, financial modelling and valuation (starter levels)

4. Buy-Side vs Sell-Side: Why Financial Modeling is Important for Both Sides

Financial Modeling and Valuation are an integral part in any interview with Investment Banking and Private Equity, Hedge Fund. You won’t want to get screwed up by tumbling on this type of question. 

Especially Sell-side jobs, Investment Banking analysts and associates do a variety of financial models to analyze, assess and arrive at the recommendations to clients. 

The best way to do your best with such interview questions is no way but diving deep into a real financial model. You learn to build a financial model from scratch, learn how to input historical data, how to make assumptions and glean data from Capital IQ, Bloomberg to project numbers. What Investment Banks, Private Equity firms and Hedge Funds ask you surrounds DCF modelling, M&A modelling, Trading Comps modelling, Transaction Comps modelling, and LBO modelling. 

Not only is it useful for you at an interview with Investment Banking and Buy-side jobs, it also prepares a solid foundation for you to start working at these firms smoothly without feeling overwhelmed in the first days. 

Step-by-step to thrive at this type of questions:

• Understand deeply core concepts like PV, FV, WACC, IRR in finance, which are essential to have an overall picture about how finance jobs work
• Learn how to read financial statements (you don’t need to dive deep into details but knowing how to interpret data and what sort of  data on financial statements to put in your models is important)
• Develop your own models, walk through DCF, M&A, Trading Comps, Transaction Comps, and LBO. 
• Look for interview questions about financial modelling and valuation to practice and rehearse at home or with your peers, or anyone who could give valuable feedback. 

For further reading, referencing our articles:

• Discounted Free Cash Flow
• Comparable Company Analysis
• President Transactions Analysis
• Accretion Dilution Models

5. Buy-Side vs Sell-Side: Which Side are You Going for?

Not all jobs on the Sell-side have the same nature of work. Neither do the Buy-Side jobs. 

If you like playing with deals, Investment Banking on the Sell-Side and Private Equity on the Buy-Side would be a good fit. If you are interested in volatility in the public markets and want to go for arbitrage opportunities (for example), you might find yourself suitable for Hedge Fund (Buy-Side), Prop Trading, and Asset Management, etc. 

If you still wonder which side you want to work for, you can scroll up and re-walk through key distinctions mentioned above. But, no matter where you work, both sides are prestigious careers, once you set your foot on their doors successfully, you will be the top 1% of outstanding professionals in the financial world.