Differences Between Private Equity and Investment Banking

Last updated on April 4th, 2024 at 10:37 am

Private equity is an asset class of equity securities that aren't intimately traded, while investment banking is a means of easing commercial deals, similar to combinations, accessions, and the allocation of securities. Both these money market-related careers are the most popular and profitable financial streams. While both play a significant role in this domain, they starkly contrast. Private equity and investment banking differ in terms of objectives, strategies, and skills required to succeed. 

This blog will provide an in-depth overview of the difference between private equity and investment banking. This can be a useful guide for you in case you are a recent graduate or looking to switch careers in finance. 

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

Private equity and investment banking differ in several ways, including-

1. Focus - Private equity firms invest in intimate companies, while investment banks focus on public companies and public offerings. 
2. Investment strategy - Private equity firms typically invest in companies with perfect performance, profitability, and value, while investment banks handle business transactions such as mergers, acquisitions, and securities financing. 
3. Purpose - Private equity firms seek long-term returns for their investors, while investment banks earn a commission for their services and seek to provide liquidity to applications. 
4. Experience Required - Private equity firms have strong logical, operational, and strategic experience, while investment banking requires strong financial modelling, valuation, and licensing expertise. 
5. Work Culture- Private equity firms are more hierarchical and focus on long-term value creation, while investment banking is known for its demanding work culture, long hours, and sales orientation.

Role of Private Equity and Investment Banking in Business

In the commercial world, private equity and investment banking are essential. Private equity firms invest in closely owned businesses to improve their productivity, value, and operations. To do this and increase long-term returns for its investors, a company may restructure, cost-slice, and enforce growth initiatives. Private equity firms typically play a more active role in managing the businesses they invest in and frequently collaborate closely with operational teams to implement changes and spur development. Private equity and investment banking are involved in anti-money laundering because they must comply with anti-money laundering regulations.

In contrast, investment banks facilitate transactions, including mergers, acquisitions, and securities financing. They help companies raise money through debt and provide visitors with early warning services on important business issues such as business finance, restructuring, and risk activity. Investment banks provide foreign exchange trading services, including corporations, hedge funds, and institutional investors. 

Key Differences in Investment Strategies

Here are the crucial differences in investment strategies between private equity and investment banking-

Private Equity-

1. Contributes to personally held companies to idealise their operations, benefit, and esteem over the long term.
2. Frequently takes a dynamic portion within the operation of the companies they contribute to, working with operation brigades to apply changes and drive growth.
3. Investment can be made of different types, counting utilised buyouts, development value ventures, and stressed obligation investments.
4. Focuses on creating value, taking a long-term approach to investments.
5. Generally contributes in companies that aren't personally traded, habitually with a solid projection for growth.

Investment Banking-

1. Focuses on easing commercial deals similar to combinations, accessions, and financing securities.
2. Helps companies raise capital through debt or equity immolations and provides premonitory services to guests on strategic enterprises similar to commercial finance, restructuring, and threat operation.
3. Provides request exploration and analysis to help guests make informed opinions about their investments and business operations.
4. Focuses on short-term deals that induce freights for their services.
5. Generally works with companies seeking to raise capital or engage in strategic deals and focuses on public requests.

Skills and Education Required for Private Equity and Investment Banking

Both private equity and investment banking require strong skills and education in finance, business, and analytical thinking. However, the specific skills and education required for each industry can differ.

Skills Required for Private Equity-

1. Strong logical, functional, and strategic skills are critical for private equity professionals.
2. Capability to perform in-depth fiscal analysis, due to industriousness, and valuation of companies.
3. Strong communication skills to unite effectively with company operation brigades, other investors, and stakeholders.
4. Strong leadership skills to drive change and growth within companies.
5. Excellent organisational and design operation tactics to handle multiple deals contemporaneously.

Education Needed for Private Equity-

1. A bachelor's degree in finance, economics, accounting, or an affiliated field is generally needed.
2. A Master of Business Administration( MBA) is frequently preferred, especially for elderly- positions.
3. Other desirable instruments may include Chartered Financial Critic( CFA), Certified Public Accountant( CPA), or Certified Management Accountant( CMA).

Skills needed for Investment Banking-

1. Strong fiscal modelling, valuation, and concession skills are critical for investment banking professionals.
2. Excellent communication and interpersonal skills to make and maintain connections with guests, stakeholders, and other professionals.
3. Strong organisational and time operation expertise to handle multiple deals contemporaneously.
4. Possess the capacity to work under pressure and fulfil a deadline.

Work Culture and Lifestyle

Due diligence in the highly competitive fields of private equity and investment banking calls for long hours, intense devotion, and an unwavering dedication to achieving outcomes. Although there are some similarities between the two activities, there are also significant differences in work culture and life. 

The work culture of private equity-

PE firms tend to have smaller team sizes and a more collaborative culture compared to IBs. PE focuses on indirect investment analysis, valuation, due diligence, negotiation, and portfolio management. The work focuses heavily on financial analysis and modelling with less emphasis on developing a deep understanding of the business being valued. 

Work culture in investment banking-

IB companies tend to have a  hierarchical and competitive work culture. IB's work focuses on advising clients on matters related to mergers, acquisitions, and other tax transactions, as well as raising capital through public IPOs and private placements. The work focuses on financial analysis and modelling, but less effort is put into customer relations and contract development.

Wrapping Up 

Private equity has a more collaborative work culture and balanced lifestyle, while investment banking has a more competitive work culture and intense pace of work. 

The Certified Investment Banking Operations Professional (CIBOP) program by Imarticus is designed to provide a comprehensive understanding for anyone interested to learn investment banking and its operations. The banking certification courses cover topics such as financial statements, corporate actions, trade life cycle, settlement and clearing, and regulatory compliance. The program is delivered through online instructor-led training and self-paced learning modules and provides students with industry-recognised certification and job placement assistance.