Investment Banking vs Private Equity

1. Investment Banking vs Private Equity Business Model

1.1. Sell-Side Vs Buy-Side

Before trying to understand the differences between investment banking and investment management, it is important to understand how the playing field in finance is set up. Typically, firms are categorised into two ‘sides’ – that is, the buy-side and the sell-side.

The buy-side generally refers to firms such as mutual funds, private equity, venture capital or hedge funds that raise capital to invest in stocks, bonds, alternative assets, or companies. In contrast, the sell-side refers to  financial institutions that are involved in the creation, promotion, and sale of financial instruments such as stocks (IPO- equity), bonds (debt), and even companies (M&A).

1.2. What’s Investment Banking?

Investment banking is the division of a bank or financial institution serving governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services.

Investment banks act as intermediaries between investors (who have money to invest) and corporations (who require capital to grow and run their businesses). Investment bankers sell business interests to investors, meaning they work on the sell-side. 

Some of the largest and most profitable global investment banks are Goldman Sachs, JPMorgan Chase, Citigroup, Barclays, Morgan Stanley, etc. 

1.3. What’s Private Equity?

Private Equity firms raise funds from high-net-worth individuals and big institutional investors to buy controlling interests in potential private companies and involve themselves in direct management decisions. 

Some mega fund private equity firms are The Blackstone Group, Apollo, KKR, The Carlyle Group, Silver Lake, TPG Capital, General Atlantic, and others. There are some elite highly specialized boutique firms that fund deals with small sums.

2. Investment Banking vs Private Equity Job Descriptions

Investment banking analysts and private equity analysts spend the first few years of their careers immersed in financial modeling, company research and valuation, and preparing presentations and reports. 

But as they climb the ladder to senior roles (Vice President, Director), they tend to do more execution work and project management like pitching potential clients on deals, getting involved in deal negotiation and developing relationships to win clients.

*These figures are for bulge bracket investment banks in the US (2021 update)

3.2. Private equity people get paid 20% to 30% higher at entry levels

Private equity total compensation varies widely because, on top of base salary, private equity analysts and associates receive bonuses that reflect closed deals and income generated from deals. For entry-level associate positions, the bonus percentage is often a fixed percentage and less variable than it is for the senior levels.

The real pay advantage in private equity comes from carried interest (“carry”), which usually becomes available only as you move up to the VP/Principal/MD/Partner levels. In private equity, carry is the profit earned between buying a business and then selling it and this is the key component of senior compensation. It is basically an additional upside to their compensation over the long-run and is tied to the performance of the fund. If you are interested in Carried Interest Mechanism, you can read more on our Private Equity Salary and Bonus with a detailed example.

4. Investment Banking vs Private Equity Work-Life Balance

Regarding the work-life balance aspect, private equity is the clear winner with better working hours than Investment Banking.

4.1. Investment bankers work around 80 to 100 hours
a week

For investment bankers, work-life balance is almost impossible as they put in an average of 80-100 hours a week, and weekends are not guaranteed days off. The intense work week in investment banking is conducive to burnout, which is why turnover rate is so high in investment banking.  

4.2. Private equity people have better working hours

Generally, private equity firms offer more reasonable working hours, and subsequently better work-life balance. 50 – 70 hours per week is the norm in the industry, with occasional Saturday work required but weekends off for the most part. 

However, at megafund private equity (KKR, Blackstone, etc.), working hours can be even worse than in banking. Also, regardless of the firm size, if you’re working on an active deal, expect late-night and weekend work and just as much stress as in IB deals.

5. Exit opportunities for Investment Banking vs Private Equity 

5.1. Investment banking exit opportunities are terrific

Investment bankers have the widest set of exit opportunities. The most popular paths to exit for bankers are private equity, hedge fund, venture capital, asset management, corporate development, and corporate finance, tech startup, and so much more. 

5.2. Private equity exit opportunities are a little bit more limited

Compared to investment banking, exit options are a bit more limited for private equity professionals. Private equity is the tier 1 among finance careers, so there are few exit opportunities more prestigious than private equity. Not to mention, private equity firms are less well-known outside finance. 

Everyone worldwide knows Goldman Sachs, but most people outside the finance industry have never heard of KKR or Blackstone, let alone top middle-market funds such as ABRY. 

That being said, private equity still offers good exit opportunities. In the job you learn how to manage a process with multiple counterparties (deal teams, lawyers, management teams, tax/supply chain advisors). Also, as you get more senior you get exposed to companies and key stakeholders management. These skill sets are very transferable to other types of roles.

6. Investment Banking vs Private Equity Recruitment – Which Is Easier To Get In?

While both are among the most competitive Wall Street careers, investment banking is considered easier to break into than private equity. 

6.1. Investment Banking Recruitment 

There are two entry-level positions that you should aim for in investment banking: analyst and associate. Whereas analyst roles are for fresh college graduates , master’s degree holders or those who have less than 7 years of experience, associates are selected from top-notch MBA universities. 

Candidates seeking to make a career in investment banking should be ready for extremely tough competition from graduates from top business schools and universities. Top strategies to successfully land a career in investment banking are:

• Go to target school: You are at a huge advantage if you come from a target school where banks heavily recruit such as Wharton, Princeton, Cornell or London School of Economics. Otherwise, you’ll have to focus more on networking to stand out. 
• Gain relevant experience: having finance experience is a prerequisite for an entry-level position in the firm. Finance clubs, stock picking teams, case competitions, or banking internships can show recruiters your interest in finance.
• Networking plays a major role in breaking through large corporate players, having the right contacts help to give you an advantage amongst others.

6.2. Private Equity Recruitment

There are on-cycle and off-cycle processes, and both differ in targeted applicants, timing, and interview:

• The off-cycle process: self-apply, usually for these situations – middle market funds recruiting associate positions, positions in non-US markets, and positions for non-experience in Investment banks 

• The on-cycle process: a few months into investment banks jobs, analysts join the megafund’s on-cycle process even though they do not start PE jobs 2 years after that. This is the most popular path for analysts at bulge brackets and elite boutique banks.

For further reading, you can check out our article about PE analysts and PE associates to learn more about the two processes. 

Private equity preferred those coming from investment banking as they spend a lot of time on financial modeling and have experience in the deal execution process. Of course, there are always exceptions if a candidate owns specific skills and knowledge that the firm is looking for, for example: an operational PE fund might look for experienced candidates in cleantech startups to manage its portfolio companies.

7. Should You Choose Investment Banking or Private Equity?

Inevitably, someone will ask for a bottom line – “Is investment banking or private equity better?”. The answer depends on the type of work that you ultimately want to do and the lifestyle/culture and compensation that you desire. 

The most common career path is: joining top league investment banks/elite boutique banks as an analyst, then exit to a top-tier private equity firm after two years of investment banking experience and work your way up to the million-dollar earning days.

Despite such a well-charted plan, once in their second year of investment banking, most professionals start to question their career strategy.

• How much better is private equity than investment banking?
• Does that make sense in terms of total earnings to make a shift from an investment bank to private equity?
• Or, should I just continue with investment banking and rise up to the ranks of the Managing Director (MD) rather than join a private equity firm?