When companies want to raise funds, they often turn to investment banks and private equity firms to help them. The difference between private equity vs. investment banking is that private equity primarily focuses on private companies — the firm invests in a company and gains some control over that company’s decisions moving forward. On the other hand, investment banks offer a broader range of financial services and typically work with large corporations and public companies.
What Is Private Equity?
Private equity (PE) is money controlled by a private equity firm. Firms invest these funds in private companies or companies not publicly traded on stock exchanges.
“PE firms typically raise capital from institutional investors, such as pension funds, endowments, and high-net-worth individuals, to form investment funds,” says Ryan Niddel, CEO at MIT45.
Some firms focus on venture capital investments, investing in early-stage or start-up companies. Other firms may perform buyouts in which they purchase a private company outright or make growth equity investments into established and expanding businesses. When choosing where to invest, private equity firms usually specialize in a particular industry or sector, such as health care or real estate.
“Private equity firms often take an active role in managing the companies they invest in, implementing operational improvements, strategic changes, and cost optimizations to enhance profitability,” says Niddel.
>>MORE: Learn more about private equity.
Careers in Private Equity
The starting point for most people in private equity is as an analyst. Analysts (sometimes called junior associates) review data, create financial models, and present research findings to higher-ups.
Analysts can then progress into senior associate positions and eventually become partners. Partners are the faces of PE firms, so they need to build strong relationships with clients and handle complex negotiations. A partner usually needs to invest their own funds into the firm, too.
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What Is Investment Banking?
Investment banking is an area of financial services that raises money (or capital) for corporations, institutions, and governments. Raising money for such large entities typically involves complex transactions, and investment banks facilitate these capital exchanges.
An investment bank’s main role is to be an “intermediary between issuers of securities (such as stocks and bonds) and investors, facilitating capital raising, mergers and acquisitions, and other financial transactions,” says Niddel.
Investment banking companies also help private companies go public through initial public offerings (IPOs) and perform research to inform the bank’s and its clients’ investing decisions.
Additionally, “investment bankers assist companies in issuing securities to raise capital from investors, both in the public markets (initial public offerings, bond offerings) and private markets (private placements),” adds Niddel.
>>MORE: Learn more about investment banking.
Careers in Investment Banking
Investment bankers follow a similar career path as PE professionals: they begin as interns, progress into analyst roles, and work their way up to associate positions. As interns and analysts, bankers handle a lot of research and present their findings to higher-ups — the analyst’s job is to support those above them and help them win clients. As associates gain more independence and responsibility, they may start direct interactions with clients.
Investment bankers can eventually become managing directors (MDs) in charge of a team of analysts and associates. MDs are also responsible for maintaining strong relationships with clients.
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Salaries: Private Equity vs. Investment Banking
Careers in finance are often lucrative, and investment banking and private equity are no different! According to the U.S. Bureau of Labor Statistics, financial and investment analysts have an average annual salary of $108,790. However, “financial analyst” is a broad title and can include many other careers outside investment banking and private equity.
Ultimately, an analyst in either industry will likely see salaries in the six-figure range. For example, entry-level analysts at Goldman Sachs reportedly make $110,000 for base salary, on top of other forms of compensation like commission, performance bonuses, and stock options. How much someone can make at a private equity firm or investment bank depends heavily on the company, location, and experience level.
Based on estimates from Glassdoor, private equity analysts have an average salary of around $111,800. On the other hand, Glassdoor estimates investment banking analyst salaries to be around $156,800 per year.
>>MORE: Check out some of the highest-paying careers in finance.
How to Get Into Investment Banking vs. Private Equity
Education and Background
You need at least a bachelor’s degree to get into private equity or investment banking. A degree in finance, economics, accounting, or business can build a foundation in the finance and business skills needed to succeed in either industry. However, different majors or coursework can be useful, too. For instance, courses in statistics or mathematics are great for learning the more complex data analysis skills used to build financial models.
A common pathway into private equity is through investment banking. Some associates seek roles in private equity rather than continuing down the investment banking path because the skills are transferable and private equity can offer new and exciting opportunities.
To progress in either space, most analysts and associates seek a master of business administration (MBA) degree. This can make them more marketable and help solidify crucial business and finance skills.
Certifications
The chartered financial analyst (CFA) designation is the most widely sought-after certification for private equity and investment banking professionals. Gaining a CFA charter shows employers you are knowledgeable in asset valuation, financial analysis, portfolio management, and investing methods.
Other certifications investment bankers may consider include:
- Certified management accountant (CMA): Displays strong skills in accounting, financial analysis, and financial management
- Certified public accountant (CPA): Shows high-level abilities in accounting and financial reporting
- Financial risk manager (FRM): Denotes skills in assessing and managing the financial risks inherent to investing
Private equity professionals can pursue certifications like:
- Chartered private equity professional (CPEP): Shows mastery of private equity concepts and finance skills
- Chartered investment and management accountant (CIMA): Denotes strong management accounting skills and the ability to manage and grow a business’s finances
- Certified financial planner (CFP): Displays high-level skills in advising investing and financial decisions
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Skills
Working in private equity or investment banking requires certain hard skills like:
- Using Excel to create financial models and analyze data
- Performing discounted cash flow (DCF) analysis
- Calculating compound annual growth rates (CAGRs)
- Comparing investment options using business valuation methods
However, both private equity and investment banking professionals need to be able to interact with clients professionally and effectively and use soft skills such as:
>>MORE: Learn the skills financial institutions are looking for with Forage’s Investment Banking Career Path.
Bottom Line: What’s the Difference?
The key difference between investment banking and private equity is that private equity deals exclusively with private companies. On the other hand, investment banking can involve publicly traded corporations, government entities, and large institutions.
However, these two careers have considerable overlap regarding the day-to-day work handled by analysts and associates. You can apply the same skills used in investment banking to private equity. In fact, many investment bankers transition to private equity during their careers. However, in private equity, professionals often take a hands-on role in the companies the firm invests in, while investment bankers act as intermediaries, facilitating large financial transactions.
“Private equity may suit individuals with a strong operational and strategic mindset, while investment banking may be appealing for those interested in financial analysis, deal-making, and capital markets,” advises Niddel.
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