Private Equity vs. Investment Banking: Top 3 Differences

Article Summary:

Private equity and investment banking are both ways that businesses find, develop, and grow capital. Each method requires a different strategy to reach the end goal of raising capital and creating revenue for investors.

Are you looking for an exit opportunity from a business, or to raise capital for a company? Private equity focuses on investing in private businesses that need to be restructured and can do so with the help of capital from investors.

Investment banking provides services and support for companies that need a large capital investment to finance expansion, issue stocks to shareholders, or develop technology. Both investment banking and private equity firms handle financial transactions, asset management, and investment management in capital markets.

What is private equity?

Private equity is the investment in equity capital in private companies. These companies are not traded publicly on the stock market, but rather are owned privately.

Equity is a share of ownership of a company, and equity capital is raised by shareholders’ shares in the company. During a private equity deal, an investor purchases a stake in a small company. The investor hopes the value of that stake will grow over time.

Private equity firms

When investing in private equity, you’re investing in a fund that is managed by a private equity firm. These firms are also called “advisors to the equity funds.” A private equity firm can be large or small, depending on whether or not it has merged with a larger company. Private equity associates also act similarly to real estate agents, since the intention is to gain control of an entity and flip it for a profit.

Similar to hedge funds and mutual funds, private equity funds are pooled funds and not open to small investors. The advisors pool together the invested funds and use them to make investments in the interest of the fund. Unlike hedge and mutual funds, private equity firms mainly prioritize long-term investments. These particular investment opportunities typically take 10 or more years, due to the investment assets the fund invests in.

It’s common practice for a private equity fund to take a controlling interest in a currently operating company and engage in the management of the business. The company that the private equity firm actively engages with are called portfolio companies. This active interest is meant to help the company increase its value. Additionally, private equity firms can make investments in startups or quickly growing companies.

IMPORTANT! Private equity funds are not subject to public disclosure requirements as they are not registered with the SEC. A private equity firm that is registered with the SEC may manage a private equity fund, but the fund itself is not registered.

Who can invest in private equity?

Generally, only accredited investors and qualified clients are able to invest in a private equity fund. The term “accredited investor” refers to a person who has:

  • a net worth of over $1 million
  • an annual income that exceeds $200,000

A “qualified client” is defined as someone who:

  • has at least $1 million in assets with the private equity firm upon signing an investment advisory contract
  • has a net worth of $2.1 million, excluding the value of their primary residence
  • has at least $5 million in investments
  • is a director, executive officer, trustee, partner, or advisor to the firm
  • is an employee of the private equity firm and has participated in investment activities for a minimum of 12 months

An accredited investor is not always a qualified client, but a qualified client is typically an accredited investor. In basic terms, high-net-worth individuals can make private equity investments.

Pros and cons of private equity

Though private equity firms can be a great help to some businesses, the practice also comes with its fair share of risks.


Here is a list of the benefits and drawbacks to consider.

  • Can help finance all kinds of companies, including startups
  • Investing in company’s success
  • Offers a business expertise and business owners an exit
  • Long-term investments that require patience
  • May lead to significant changes in business structure
  • Could result in several layoffs

Advantages of private equity explained

Private equity firms typically have deep pockets that can help fuel growth for a given company, including startups. Using these financial resources, private equity firms want to ensure that a company grows — for their benefit. When a private equity firm invests in a company, they are investing in its success.

This interest and investment in a business can provide expertise, connections, and incentives for a company. Private equity firms also provide exit opportunities for business owners.

Disadvantages of private equity explained

Private equity investments are long-term investments. Investors have to wait to see any kind of return on their initial investment.

Private equity firms have gained a bad reputation for investing in companies and engaging in employee layoffs. The intention of the investment is to reshape companies and generate profits, and that sometimes means replacing employees. This can be detrimental to local communities that rely on certain jobs and industries for survival.

Pro Tip

If you are considered a qualified client or accredited investor and can wait approximately 10 years to see a return on investment, private equity investing may be a profitable option. However, don’t be afraid of reaching out to an investment advisor to get another perspective on the idea.

What is investment banking?

Investment banking focuses on the creation of capital for governments and other entities. This specific banking division underwrites debt and equity securities for corporations and aids in the sale of securities. Investment banking also focuses on assisting mergers and acquisitions, as well as helping institutions and private investors broker trades. In its most basic form, investment banking involves selling assets for another entity in very large quantities.

Investment bankers also work to sell shares of private companies to the public. An initial public offering (IPO) involves new stock issuance, which allows a company to raise capital from investors while giving them stock in return. For IPOs, investment bankers are responsible for underwriting the IPO, preparing documentation, marketing, filing, and issuing. Investment bankers act as middlemen between corporations, who require capital, and investors, who have the capital to give.

Who can invest through investment banking?

Investment banking is a capital-raising service that facilitates initial public offerings. If a person is a previous client of an investment bank, they may be offered the opportunity to directly invest in the IPO. In this case, the individual will have the opportunity to purchase the shares at the offering rate. Investment banks typically offer IPOs to their high-net-worth clients.

Once the company’s shares have been resold to the public (and after the initial IPO period), an investor could then purchase shares through a brokerage firm, such as the ones below. If an investor has the opportunity to directly purchase an IPO that’s in demand, it is considered to be a unique circumstance.

Pros and cons of investment banking

Just as with private equity firms, investment banking isn’t all good or bad. Before getting involved with investment bankers, consider these benefits and drawbacks.


Here is a list of the benefits and drawbacks to consider.

  • Significantly raise capital to invest back into the company
  • Offers exit opportunities to stakeholders
  • Sold shares may change a company’s direction
  • Founder may lose control of company
  • Comes with significant fees and administrative work

Advantages of investment banking

One of the biggest advantages of investment banking is the ability to raise capital. Once an IPO goes public, the fundraising possibilities are endless. The capital raised by an IPO can change the trajectory of a company completely. Investment banking can help corporations fund research, significantly reduce debt, hire talent, build buildings, and much more. Both investment banking and initial public offerings provide the capital for a company to expand significantly.

Investment banking also offers exit opportunities to stakeholders. Typically, investors have to have long periods of time to see any kind of return on their investment and eventually look for exit strategies. The investment banking business is one that endures long-term investments. Through selling shares publicly, stakeholders are offered an exit opportunity to liquefy any capital they have tied up in the company.

Disadvantages of investment banking

Investment banks offer financial and advisory services, but there are disadvantages to the investment banking industry. Market pressures can shift the direction of a company, regardless of the founder’s initial vision.

The founder can even experience a loss of control over a company once it’s publicly traded. The IPO process can also come with a hefty price tag, including underwriting and other administrative work.

Investment banking vs. private equity as a career

Fortunately, positions in both the investment banking and private equity sectors are growing quickly, according to the Bureau of Labor and Statistics (BLS). If you have a passion for finance, you may want to consider these career paths.

Private equity positions

To be involved in the private equity industry, try looking first for an entry-level associate or analyst position. You may be able to start an internship or full-time position while still in school, where you hopefully gain a background in banking and business through an undergraduate degree or Master of Business Administration (MBA).

Whether you start as an entry-level associate or quickly find yourself in a higher-level position, your career in private equity will focus on screening and executing investment deals, managing and selling investment portfolios, and fundraising. If you become a top-earner in the firm, you’ll likely continue to move up the corporate ladder.

Investment banking positions

Positions in investment banking include banking analysts, capital market analysts, consultants, trading specialists, and more. As a general rule, a degree in economics, finance, mathematics, or accounting is the foundation of any banking career.

You should pursue an MBA if you’re interested in an investment banking career, but a bachelor’s degree would likely be sufficient for an entry-level commercial position. Additional licenses may be required depending on the position.

Investment banking vs. private equity compensation

Salaries for investment banking and private equity associates vary greatly. The BLS reports the entry-level salary for an investment banker as $76,000 per year. With 10 to 19 years of experience, investment bankers can expect to earn upwards of $146,000 per year. Investment bankers typically rely on bonuses to increase their annual salary.

Private equity associates can expect to earn around $74,000 annually in an entry-level position, with senior private equity associates earning a salary upwards of $169,000 yearly. Salaries for investment banking and private equity associates vary greatly and are dependent on experience within the banking industry.

Private equity vs. investment banking: Top 3 differences

Both private equity and investment banking appear to have similar goals of raising capital but go about the process in very different ways.

1. Buy-side vs. sell-side

Private equity firms purchase business interests on behalf of investors and work on the buy side. These investors have already fronted the funds for these investment purchases made by the private equity associates. Private equity firms also purchase controlling interests in companies with the intention of reshaping the business by way of managing decisions.

Investment bankers work to sell business interest to investors. Companies may solicit the help of an investment bank when they’re planning to go public or are completing a merger-and-acquisition deal. Investment banking’s primary clients include private companies and corporations.

2. Analysis

Private equity associates tend to be more involved in the investment process since their money is being used for investments. There is a more incurred risk for the individuals’ capital. Private equity analysts are more critical of the investment process, as opposed to investment banking.

Investment banking analysis is more inexplicit and vaguer compared to private equity. Investment banks are subject to compliance risks and regulations, and having clear, specific guidelines can be misconstrued as deceptive. Rather than risk being labeled as misleading, investment banks keep their overall analysis vague.

3. Company culture

Private equity firms tend to be smaller than investment banks, with only five to ten employees per firm. While private equity firms are typically small, there are some that have merged with large market caps, creating a larger firm overall. The hiring process for new candidates in private equity is selective, but once a candidate is onboarded, there are fewer rigid requirements in the average workday.

Investment bankers are part of the high-stress corporate culture where 14-hour workdays and daily suit-and-tie requirements are common. Typically, private equity firms tend to be less stressful for employees compared to investment banks. There is more balance, and the industry is more forgiving with its employees.

Both investment banking and private equity firms deal with high-net-worth funds and assist with corporate development. While private equity investing isn’t as much stress as investment banking, any industry in corporate finance comes with pressure to succeed. Managing investments — in the private equity world and investment banking world — requires knowledge, discipline, and commitment.

Key Takeaways

  • Private equity investors invest their own money into privately owned companies.
  • Investment banks market shares of publicly traded companies to investors.
  • Both private equity firms and investment banks are involved with getting company shares into the hands of investors, and both aid merger and acquisition deals.
  • Private equity typically has more work-life balance compared to investment banking.
  • Investment banking is typically a higher-stress industry to work in and has less work-life balance.
  • Private equity associates tend to work fewer hours and have a more relaxed company culture compared to investment bankers.
View Article Sources
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  2. Accredited Investors – Updated Investor Bulletin — U.S. Securities and Exchange Commission
  3. Updated Investor Bulletin: Investing in an IPO — U.S. Securities and Exchange Commission
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