Investment Banking vs. Private Equity: What's the Difference?

Triston Martin

Nov 02, 2023

Investment banking is a highly competitive field that requires professionals to become well-rounded and knowledgeable. It is a full-time occupation that many do not actively choose, but rather end up in through different paths such as college, family connections, or extracurricular activities. Investment banking jobs usually require the holder of an undergraduate degree or masters with a concentration in either finance or economics and an MBA from a top school with financial analysis experience. Most investment bank companies need six years of experience before hiring people into the company.

On the other hand, private equity firms only require people who have three years of experience within their particular niche area (e.g., venture capital). However, to be considered for a job at these companies, one must hold an undergraduate degree with a concentration in either finance or economics and an MBA from a top school. Most private equity companies only need five years of experience before hiring people into the company.

What Is Investment Banking?

Many myths exist about investment banking and the kind of work that is done within the industry. The first myth is that investment banking only backs companies during initial public offerings (IPOs). This, however, is false because there are many different products that an investment banker can bring to a company. Most people in this field have no idea of what they have been offered or what they are going to do while they are in the firm. The second myth is that it is a high-paying job. Unlike many other industries where degrees and experience lead to higher starting salaries, such as engineering and medicine, at most investment banks there are only two paths to move up: lateral moves or promotions. There is no fast track. Not to mention, most jobs are only as good as the person who is in it. Finally, most investment banks now have a high percentage of women and minorities in their firms.

What Does An Investment Banker Do?

Investment bankers usually work long hours and are similar to marketing analysts in many ways (e.g., analysis of products, making recommendations to potential clients). An investment banker usually does not work with numbers or financial statements; instead, he works with business presentations and key points listed by his client. Investment bankers' day-to-day responsibilities include: creation of presentations (i.e., business plans) based on the needs of their clients; preparation and updating of risk charts (i.e. probability of default); formal meetings with clients; research of industries and competitors; analysis of unique products and services offered by a client; evaluation of the potential for each product to generate profits for the client; market research in your particular industry sector (career path is usually based on this information) to determine which competitor will offer the best deal.

Why Investment Banking?

Although investment banking is highly competitive, it is one of the few industries that allows you to leave for another company within a few days. It is also an industry where there are more positions than people who want them, so professionals have a much better chance of receiving a job offer from their preferred employer than if they were in any other profession. Many people do not realize that in this industry, one is constantly learning with every new project, every potential deal, and with every new client. It is a highly challenging industry; you need to meet strict deadlines and make sure that you are able to excel within your particular niche. Investment banking allows professionals to be versatile and challenge themselves professionally because of the lack of structure within the industry.

Why Private Equity?

Many people would ask: why private equity (PE)? Within PE, there are many different niches that offer different growth opportunities. In PE, you can see your investment grow 100% or even more in such a short period of time. Within the private equity world, you can do mergers and acquisitions, venture capital, mezzanine financing (i.e., second-tier financing), distressed investing (i.e., buying out troubled companies), and a host of other niches that allow for a great deal of growth within a short period of time.

In addition to this extreme growth potential, there are very few people who are willing to take the first step into PE because private equity is not as popular as investment banking among college students and junior professionals. One reason people frequently cite for not wanting to pursue private equity is that a growing number of investment bankers are quitting in order to work in PE or other industries (e.g., consulting).

Lastly, there is a lot of money in the industry (approx. $7 trillion), and with this money comes a stable career full of growth potential, the potential for upward mobility within the industry (i.e., "moving up the ladder"), and many perks such as flexible working hours and increase due to the amount of money involved in this industry.

How to Begin A Career in Private Equity?

In order to begin your career in private equity, one must first understand what the industry is and what it involves. Most people would think that the only way to go into private equity is after working at least 5 years in investment banking (as an analyst or associate). Instead, your career path in PE starts upon graduation from college. If you are interested in pursuing a career in PE, you should take as many business-related courses as possible. Finance and economics are perhaps the two most important subjects that anyone who wants to pursue a career in PE should learn. PE is highly competitive and it is not easy to land a job with one of the most prestigious firms. The best time to begin a career in PE is the summer after college graduation when you are considering starting your job search. However, if you identify with industry (e.g., consulting), a good idea would be to start during your sophomore year in college as you are still fresh out of high school and have many people willing to hire you.

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