Investment Banking vs. Private Equity? What is the best choice?

It’s true that many investment banking analyst/consultants consider private equity to be their exit opportunities. However, to see whether it’s a suitable choice for you or not, let’s have a deeper insight into the differences between these two regarding the roles, culture/lifestyle, compensation and the needed skills.

1. The Business Model

The main difference lies in the core business of the two roles. When coming to an investment banking role, we understand it as an advisory/capital raising service. In other words, the main task of an investment bank is to provide clients with advice on transactions such as M&A, restructuring facilitating capital-raising.

Meanwhile, private equity firms will be investors, not advisors. They will be ones who collect pools of capital from various parties such as pension funds, endowments, insurance companies and prosperous individuals, etc. Therefore, the main revenue stream of these firms would come from:

  • The incentives of the pools of money they have successfully persuaded customers to invest.
  • Generated money returned on their investment.

Of courses, there may be some intersect between these two work scopes. For example, investment banks, in order to persuade a Private Equity to follow a deal, they may approach and pitch out their ideas.

2. Associates vs. … Associate?

There are usually three key tasks that the investment banking entry-level analysis (analyst/associate) have to encounter: pitchbook creation, modeling and administrative work.

However, when it comes to private equity, it will be less standardization. Different funds will have different ways to engage their associates, but there are four main areas that all private equity associates need to participate to some extent, which are: Fundraising, Screening for making investments, managing investments and portfolio companies and exit strategies.

 

2.1. Fundraising

Although this work is usually taken by the most senior private equity professionals, associates may participate to support the process. Some tasks may be to arrange the presentations that demonstrate the funds’ past performance, strategy and track record.

2.2. Investment Opportunities Screening

This will be a major role that the private equity associates will handle. In order to decide which investors and why the fund should invest capital, the associate will analyze the feasibility based on financial models as well as key investment rationale for senior management. It is also essential that the analysis covers how the investment can supplement other portfolios owned by the PE.

2.3. Managing Investment and Portfolio Companies

This is often managed by an operations team. However, associates, especially ones who have experience in management consulting, can support by assisting the portfolio companies to revamp its operations or improve its operating efficiency (through the EBITDA margins, ROE, cost-cutting). The fund and its strategy will decide the amount of interaction that the associate may get (There are funds that Associate dedicated to just this part of the deal process).

2.4. Exit Strategy

Both the associates (the junior team) and the senior management will take part in this process. To be more specific, the main job of associates is to screen for potential buyers, then build proper analysis to compare exit strategies. This task is relatively heavy in modeling as well as it requires the executives to have an in-depth analysis.

The consulting services of investment banking include two main areas:

  • Underwriting – Investments bankers raise capital, usually via the IPO process (selling stocks or bonds to an investor) on behalf of corporations.
  • Mergers & Acquisitions (M&A) – Advisory roles for both buyers and sellers of businesses, managing the M&A process start to finish.

3. Culture and Lifestyle

Well, it is fair to say that the lifestyle when working for PE is better.

With investment banking, be prepared that your work-life balance is not so great. Moreover, with investment banking, you will have a lot of work and projects you have to do on your own, with little direction is provided. Nevertheless, there are some advantages apart from the monetary and career aspects. One of them is that you are having a chance to develop close friendships with your peers because you are all in the trenches together.

Meanwhile, you will still have to work hard as well, but the schedule is not that bad. In reality, when it comes to an active deal, you may have to work quite stressfully, but otherwise, it is much more easy-breathing. You usually get into the office around 9 am and may leave between 7pm-9pm. Though when you are having an active deal, it is likely that you have to work on weekends, but overall, you are free.

In terms of lifestyle, there are two different cultures that you may meet. To be more specific, there are PE funds adopting the “Google” approach, where the employees can freely access free food, toys in the office, or even beer right in the office. But of course, there are PE that has the traditional operations with the model more like a cube environment.

In addition, Private Equity firms’ size tends to be small (but there are some exceptions), so it is likely that your fund only contains 15 people in total. With such a small scope, as an associate, you will have the chance to interact with everyone, including your most senior partners. Therefore, your senior managers will certainly know your name and your job, which is less likely to happen in the bulge bracket investment banks.

Another thing worth considering is the sense of contribution. To be more specific, private equity is quite similar to sales and trading in the culture of performance, which urges the PE associates to be closer to the action, making them feel like they are directly contributing to the fund performance. In contrast, that sense of feeling is absent from investment banking, when analysts and associates have virtually no impact on whether a deal closes or not.

4. Compensation

Generally, both investment banking and private equity compensation contain two main parts: salary (base) and bonus. The base part between the two roles is relatively equivalent. However, the bonus of investment banking is based on a hierarchical basis, which means that the higher position you achieve, the more bonus you gain (based on both individual and group performance).

Investment Banking

  •  Analyst – First Year: $70k – $150k
  •  Analyst – Third Year: $120K – $350K
  •  Associate – First Year: $150K – $350K
  •  Associate – Third Year: $250K – $500K
  •  Vice President: $350K – $1.5MM
  •  Managing Director/Partner: $500K – $20MM+

Private Equity Salary Range

  • Analyst/Associate – First Year: $100K – $250K
  • Analyst/Associate – Second Year: $150K – $300K
  • Analyst/Associate – Third Year +: $170K – $350K
  • Vice President: $300K – $800K
  • Managing Director/Partner: $500K – $10MM+

5. Conclusion

So in the end, what industry is better? Well, the answer, unfortunately, is: “It depends”. Your choice will finally be based on the type of work you want to do, your desired compensation, the scope of work you can handle, and what lifestyle/culture is more suitable to you.

With investment banking, you will have the chance to possess a clear long-term vision, since you are put at the center of the capital market and exposed to various types of financial transactions (the exposure extent will depend on your group). But if you are looking for an investment banking exit opportunity, apart from private equity, there are still some options that you may want to consider. Check out for more investment banking exit opportunities here.

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