Private Equity vs Investment Banking – What To Know

private equity vs investment banking

If you’re willing to work in investment, investment banking and private equity are two of your most viable choices. With so many similarities between both careers, you may ask: how does private equity vs. investment banking stack up in the real world?

Both careers specialize in creating capital for companies and governments but in different ways. While private equity focuses on sourcing investment capital from wealthy individuals and firms, investment banking advises clients on major decisions relating to capital generation.

There are so many similarities between these two careers that switching between them is incredibly common. These similarities also make them somewhat confusing, and this post will explain some of the differences between these two careers.

What Is Private Equity?

Private equity refers to alternate sources of investment and capital generation that are typically not listed on the public exchange.
In private equity, the capital is usually sourced from institutional investors and wealthy individuals who buy shares of private companies intending to delist them from the stock market.
Put simply, private equity firms raise capital from investors and then invest the realized capital in private companies.
Private equity investors buy the majority stake in any company in which they invest. Most of the time, they buy 100% of the company, putting it under their control.

When a private equity firm purchases a company, they try to maximize the return on their investment by providing the company with all the necessary tools and expertise for success. These may include mentorship and restructuring, but it’s certainly not limited to that.

Types of Private Equity Strategies

Private equity firms use different strategies to invest in a company, as long as it has the potential of returning profit. A private equity investment can be in the form of a buyout, growth equity, or venture capital.
In this section, you’ll get a brief analysis of these types of private equity investment strategies, how they differ, and how they relate to the overall goal of a private equity company.

  • Buyouts

Most private equity investments are buyouts, as they give the firm the most control over their investment. As the name suggests, a buyout occurs when a private equity firm buys a majority stake in a public company to delist them from stock exchanges, effectively taking them private.

There are two major types of buyouts: leveraged and management buyouts. In a typical leveraged buyout, some of the acquired company assets become part of the investment capital. If the company makes profits in the future, part of the profits will be used to service the loan.

Management buyouts, on the other hand, don’t use the assets of the acquired company. Current stakeholders can cash in on their shares from the revenue generated for the acquisition, making for a complete takeover of the company.

Leveraged buyouts are less risky to the private equity investors but are generally disliked by stakeholders in the acquired company for obvious reasons.
The private equity firm can make business-oriented changes after the buyout to ensure the profitability of its investment.

  • Venture Capital

Venture capital is somewhat different from other types of private equities, and some investors don’t even consider it as part of private equity.
Venture capitalists focus on investing in start-ups for a share, even before they start to turn profits. Unlike most other forms of private equity, investors don’t need to take control of the company, and they typically don’t have a majority share.

Venture capital investments are speculative and consequently risky. However, the potential ROI from this investment type is also mind-blowing, kind of akin to winning a gamble.
While most people see venture capital investments as risky gambles, they aren’t. Private equity firms conduct plenty of research before investing in a start-up to minimize the potential risks and maximize profit.

  • Growth Equity

Growth equity is similar to venture capital investing but with established companies. Instead of betting on start-up ideas, growth equity investors conduct extensive research about a growing company before making their investment.
Growth equity differs from a buyout since the private equity firm doesn’t need to acquire or take control of the company. The company stays under the control of its current owners, but with the PE investors having a share.

What Is Investment Banking?

Investment banking firms work with large companies to proffer money management advice, help to underwrite the debt, and manage capital. In short, investment banking firms help companies manage their capital and make major financial decisions.
While most people confuse investment banking with private equity, they’re pretty different. While private equity companies generate capital to acquire companies, investment bankers help raise and manage capital for their clients.

The typical client of an investment bank includes governments, corporations, and other institutions that manage huge capitals. These client categories have different uses for investment banks, all of which we’ll list in the next section.

Functions of Investment Banking

It may sound like most of the functions of an investment bank includes what a company should naturally have provisions for. If that is the case, why do most large corporations, including the government uses investment banks?
Here are some of the roles of investment banking in a corporate setting that explain why most organizations need a dedicated investment banking firm to make the right financial decisions.

  1. They help with acquisitions and mergers:
    Perhaps the most essential function of an investment bank to a company is helping with acquisitions. An investment bank can act as a representative for either the seller or the buyer during acquisition.

    Investment banks also help in the valuation of a company. They gather information about the company being acquired and scour financial records to recommend an estimated value of the company.
    An investment bank can also help the acquiring organization to raise funds, simplifying the entire process.
  2. They help stage IPOs:
    Whenever a company is ready to go public, they typically hire investment banks to help issue the IPO. Investment bankers excel in helping to take a company public, making excellent helpers for initial public offerings.
    Most times, the investment bank manages everything regarding the IPO. Using in-house information, they file a registration statement to the SEC. They also work out the financial details and help to get the IPO on the stock exchange.

    In return for helping to list the company on the stock exchange, an investment bank earns a commission. They can also act as the company’s financial adviser, making consistent profits in the long run.

Private Equity vs Investment Banking: Do You Need Investment Banking for Private Equity?

If you’re looking to become a private equity analyst, you must have a bachelor’s degree in finance-related courses. However, the requirements for making an entry into the industry are much more complicated in the real world.

Unless in special cases, private equity firms won’t hire you to become an analyst if you’re a straight out-of-school graduate. The best way to prep up for a private equity analyst post is by getting some years of experience in the investment banking industry.
Theoretically, you do need to have investment banking experience to bag a job in private equity. Other than that, the requirements for becoming an investment banking associate aren’t outrageous.

When comparing private equity vs investment banking or private equity vs venture capital, the latter wins with the lower barrier to entry,

Is It Harder to Get Into Venture Capital or Private Equity?

Venture capitalism is much more laser-focused than private equity, and consequently, private equity is much more complex. The average venture capitalist is a lot less experienced in the investment industry than a private equity analyst.

In addition to that, it’s significantly more difficult to transition from a venture capital job to a job in private equity due to the complexities in PE.
While private equity firms research and acquire companies across all industries, venture capitalists usually restrict their investments to technology, fintech, and clean technology.

In summary, it is significantly harder to become a private equity analyst than to get started being a venture capitalist. However, it’s important to note that venture capitalism is a subset of private equity, and, naturally, it’s less complex. You should read more on the comparison between venture capital and private equity here and see which will be best at different stages of your startup


If you love working with corporate-level investments, you have two main options: investment banking and private equity. These two careers let you analyze companies and recommend investment decisions for corporate clients, including the government.
Of the two, investment banking has the lowest barrier to entry since you need some years of experience with investment banking to make an entry into private equity.
The earning potentials are pretty convincing for both careers, and they both have some exciting tasks. If private equity sounds too complex, there are alternative but related careers, a prominent one being venture capitalism.

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