Private Equity Investment vs Investment Banking (which is better?) (2024)

FAQs

Is private equity or investment banking better? ›

Private equity is extremely prestigious. Compensation for both careers is very high, but the work/life balance in private equity is better, it is often the preferred exit route for investment bankers who have a few years of experience.

Investment Banking vs Private Equity Salaries

Both investment banking and private equity are well-paid jobs but the compensation ceiling is far higher in private equity than it is for investment banking. This explains why most investment banking analysts choose private equity as their exit option.

Private equity is an attractive investment option for high-net-worth individuals and institutional investors because of its potential for high returns. Private equity falls under the category of alternative asset classes.

Unlike banks, private equity firms have no need to hire an army of analysts to do grunt work: they're not creating pitch books and competing for sell-side, buy-side, and financing mandates all day, and if they're understaffed they can say “no” to potential investments.

Key Differences

Investment banking offers financial services to companies seeking to raise capital, while equity research professionals analyze publicly traded companies and make investment recommendations. An investment banking analyst prepares pitch books as well as information memorandums.

A career in private equity can be highly rewarding, both financially and personally. Buyout equity managers often take a great deal of satisfaction from successfully guiding their portfolio companies to new, higher levels of profitability.

Private equity can help to diversify a portfolio by mitigating both public market risk and cyclical risk. The way that the majority of investors access public markets is through index funds, which invest a proportion of capital in every stock in a particular index.

Use of leverage and cash flow.

Private equity typically uses cash and debt to acquire businesses. This use of leverage sets up a much higher internal rate of return (IRR) since this is based only on their invested cash.

A role in private equity is a very competitive yet rewarding career path. Getting started in a profession in private equity (PE) requires strong analytical and networking skills to jumpstart a career at a PE firm.

Private equity firms are usually smaller and more selective about their employees. But once a hire is made, they care less about how performance is maintained. There are exceptions and overlaps in every industry but, in general, the average day is a bit less stressful for private equity associates.

What is the main disadvantage of private equity investment? ›

One of the main disadvantages of private equity is the lack of liquidity. Unlike publicly traded stocks and bonds, private equity investments are not easily converted to cash. This can make it difficult for investors to exit their position if they need to do so.

Private equity investing often have high investment minimums, which can magnify gains but also magnify losses. Liquidity risk exists since private equity investors are expected to invest their funds with the firm for several years on average.

Goldman Sachs Capital Partners is the private equity arm of Goldman Sachs, focused on leveraged buyout and growth capital investments globally. The group, which is based in New York City, was founded in 1986.

While investment banking is by far the most common training ground for private equity, it is also possible to recruit for private equity roles after doing entry-level consulting, especially if you are a top performer at a top management consulting firm.

Unique risk-return profile.

Private equity funds offer particularly high returns that are less correlated to public markets. See Why invest in private equity for more on how private equity returns compare to other asset classes and how including private equity in a portfolio affects the risk-return profile.

Investment banks help the broader financial markets and the economy by matching sellers and investors, therefore adding liquidity to markets. The actions of the banks also make financial development more efficient and promote business growth, which in turn helps the economy.

Investment banking professionals will mostly work to earn a business deal and handle financial modeling to some extent. Thus, if you are passionate about investments, it's better than going for portfolio management, private equity, or hedge fund.

It's quite difficult to get promoted to VP because the nature of the job changes a fair amount at that level. Many Associates and Senior Associates at larger PE firms realize there is no great path to VP there, so they end up going downmarket to advance.

Private Equity Associate Compensation: Base Salary + Bonus

For the vast majority of private equity associates, the base salary is around $135k-$155k. Then, based on fund performance, bonuses tend to range from 100% to 150% of the base salary.

What is the highest salary in private equity? ›

Highest salary that a Private Equity Analyst can earn is ₹30.0 Lakhs per year (₹2.5L per month).

But in real life, most people are drawn to private equity because it offers high compensation, somewhat better hours than investment banking, and more interesting work.

Private equity firms invest the money they collect on behalf of the fund's investors, usually by taking controlling stakes in companies. The private equity firm then works with company executives to make the businesses — called portfolio companies — more valuable so they can sell them later at a profit.

The third private equity boom and the "Golden Age" of private equity (2003–2007) As 2002 ended and 2003 began, the private equity sector, had spent the previous two and a half years reeling from major losses in telecommunications and technology companies and had been severely constrained by tight credit markets.

With this power, however, comes greater accountability, as they're more deeply involved as company shareholders. This can lead to greater stress in private equity than in consulting firms.

Hedge Fund Compensation:

Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you'll most likely earn a bit more in private equity.

Looking at bottom-quartile funds, he found that 75 percent had failure rates of 35 percent or higher. The average is around 27 percent for buyout firms.

Hours: Without question one of the biggest drawbacks are the hours that Investment Bankers work. It is not unusual to be expected to work through the night when deal flow is high. Working weekends is also common when deals are close to being struck. The markets might be closed but the Investment Bank is open 24/7.

The controversy surrounding private equity is that whatever happens to the company acquired, private equity makes money anyway. Firms generally have a 2-20 fee structure, which means they get a 2 percent management fee from their investors and then a 20 percent performance fee on the money they make from their deals.

What is the most risky form of investment in a public company? ›

But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments. If a company doesn't do well or falls out of favor with investors, its stock can fall in price, and investors could lose money.

Venture capital is generally considered riskier than private equity, as it involves investment in early-stage companies that have a high likelihood of failure. However, private equity can also carry significant risk, as they invest in established companies that are facing difficult market conditions.

There are many articles in the press and online that give an extremely negative view of PE and VC, even giving pejorative nicknames like “vulture capital.” Critics claim private equity firms are bloodsuckers that pile healthy companies with debt then strip out their asset, leaving a lifeless shell.

Deloitte's Private Equity practice supports private equity managers, investment funds and private equity-backed companies with valuable insights and innovative solutions across the entire private equity lifecycle.

Private equity funds raise money from investors, who become limited partners (LPs) in the fund. These investors can range from large endowments to high net worth individuals. Commitments for investment from LPs are solicited through marketing roadshows.

Who can invest? A private equity fund is typically open only to accredited investors and qualified clients. Accredited investors and qualified clients include institutional investors, such as insurance companies, university endowments and pension funds, and high income and net worth individuals.

Most private equity firms typically look for investors who are willing to commit as much as $25 million. Although some firms have dropped their minimums to $250,000, this is still out of reach for most people.

Although most large private equity firms look exclusively for job candidates with an MBA, you can still get into a smaller firm without one. Smaller firms prefer candidates with an MBA, but it's not always a requirement.

The first step to becoming a private equity associate is earning a bachelor's degree in a finance-related major, such as finance, accounting, statistics, mathematics or economics. While attending college, maintaining a high-grade point average may impress future employers.

The Sharks are venture capitalists, meaning that they provide capital (money) to companies with the potential for growth in exchange for equity stake.

What is private equity in a nutshell? ›

Private equity, in a nutshell, is the investment of equity capital in private companies. In a typical private equity deal, an investor buys a stake in a private company with the hope of ultimately realising an increase in the value of that stake.

Berkshire Partners is an American private equity firm based in Boston. It has invested in over 100 middle market companies since 1986 through nine investment funds with aggregate capital commitments of more than $16 billion.

And if you don't stay to see the long-term results of your deals over many years, you won't receive the benefits of carry. The bottom line is that yes, the pay ceiling is higher in private equity, and there are MDs and Partners who earn many times – sometimes hundreds of times – what MDs in banking earn.

Private equity can help to diversify a portfolio by mitigating both public market risk and cyclical risk. The way that the majority of investors access public markets is through index funds, which invest a proportion of capital in every stock in a particular index.

One of the main disadvantages of private equity is the lack of liquidity. Unlike publicly traded stocks and bonds, private equity investments are not easily converted to cash. This can make it difficult for investors to exit their position if they need to do so.