December 4, 2023
10 min read
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In 2022, the investment banking market size was $153 billion, while private equity reached an impressive $655 billion. This exemplifies just one of many differences between the two financial sectors, which, however, share a common goal — raising capital for investing purposes.
In this article, we’ll explore more differences between investment banking and private equity, compare offered career opportunities, and discuss the best software tools for successful deal management.
What is investment banking?
Investment banking (IB) is a division of a bank or financial institution that helps individuals, corporations, and governments complete large and complex financial transactions, like mergers and acquisitions (M&A) or initial public offering (IPO). Two key services it provides are:
- M&A advisory services. Investment bankers specializing in M&A guide clients (from both sides of a deal) through the entire M&A process. This includes identifying and evaluating targets or acquirers, financial modeling, valuation, due diligence, negotiation, integration planning, and addressing transaction complexities. The goal is to ensure that M&A activities align with the strategic objectives of the involved parties.
- Underwriting (capital raising). Underwriting involves investment bankers helping companies raise capital by issuing stocks or bonds. In the underwriting process, they assess the risk, set the price, and then sell the securities to the public or institutional investors. This assists companies in securing the necessary funds for various business interests, from expansion to debt refinancing.
The investment banking division shouldn’t be confused with investment banks, often referred to as “bulge bracket investment banks,” which go beyond raising capital and consulting and offer a variety of other services, including sales and trading, asset management, commercial banking, retail banking, and executing broker trades. Examples of such banks include Goldman Sachs, Morgan Stanley, and Citi.
Career opportunities in investment banking
An investment bank offers plenty of career opportunities, from entry-level analyst and associate positions to leadership roles such as managing directors. Let’s explore each in more detail.
| Career level | Responsibilities | Salaries (USD) | Hours/week | Exit opportunities |
| Investment banking analyst | Excel and PowerPoint work Tracking buyers/sellers Managing data rooms Responding to requests Financial modeling and valuation Due diligence Negotiation support | $65,000- $105,000 | 70-85 | Most analysts choose private equity as their exit option. Other options include hedge funds, asset management, corporate finance, corporate development, and venture capital. |
| Associate | Assigning and checking workSome Excel/PowerPoint work More meetings Client interaction Financial modeling and valuation Due diligence Project management | $240,000-$450,000 | 65-80 | Opportunities are more limited, like switching banks or moving into corporate development. |
| Vice president | Project management Communication with Directors More client interaction Deal pitching Deal execution oversight Relationship development | $400,000-$600,000. | 55-70 | Limited options, like switching banks, moving into corporate development, or going into a different field. |
| Director or senior vice president | Mix of VP and MD responsibilities Project management or relationship development Client interaction Deal negotiation support Execution oversight | $500,000-$700,000 | 50-60 | Limited options, like switching to another company or bank or moving into a buy-side role such as private equity (rare). |
| Managing director | Winning clients Developing relationships Interactions with primary clients Deal negotiation support – Execution oversight Business development | Under $1 million to several million dollars | 50-60 | Moving into high-level roles in companies, possibly private equity or other buy-side roles. Most leave for lifestyle reasons. |
To start a career path as an investment banker, a candidate should pursue certain professional qualifications. Entry-level positions often accept candidates with a bachelor’s degree in finance, accounting, or business administration, while pursuing a master’s degree is common among mid-level and senior staff.
Also, while professional certifications are not mandatory, the Chartered Financial Analyst (CFA) designation, awarded by the CFA Institute, is widely recognized and can offer a competitive advantage in the job market. Investment bankers may also need to secure licenses from the Financial Industry Regulatory Authority (FINRA), such as Series 63 and Series 79.
What is private equity?
Private equity (PE) involves investing money in companies that are not publicly traded on the stock exchange. For that purpose, investment management firms are established, known as private equity firms. They create private equity funds by pooling capital from institutional and accredited investors — individuals who can commit substantial amounts of money for a long period of time.
As private equity firms use their own capital for investing, they are considered an investment business rather than an advisory one.
Here’s how a typical private equity firm functions:
- Capital raising. It raises capital from institutional investors and accredited individuals.
- Target identification. It identifies potential investment opportunities, usually in private companies.
- Due diligence. It conducts a thorough analysis of the target company’s financials, operations, legal aspects, market position, management team, growth prospects, and potential risks.
- Deal structuring and acquisition. It acquires a significant ownership stake in the target company after negotiating and structuring the deal.
- Operational improvement. It participates in the management and strategic decisions of the invested company to enhance its operations and performance and create value.
- Exit strategy. It develops a plan for exiting the investment, which can include selling the company or taking it public, realizing returns on the investment, and distributing them to the investors.
Private equity investment carries many risks, as investors use their own money. However, it also offers the possibility of substantial gains through active involvement in the growth of the invested companies.
The leader of a private equity firm, who has appointed new CEOs for half of his portfolio companies says, “We are focused on performance. When we replace them, we cast the net broadly. We don’t just look inside the company. We want to install a management team with the skill and the will to succeed.”
Career opportunities in private equity
Private equity offers diverse career opportunities, ranging from entry-level analyst roles to top-tier positions such as managing directors. Despite similarities in working hours (60-80 per week) and common exit goals (PE is usually the end goal), these positions differ in responsibilities, promotion time, and compensation. More about them in the table below.
| Career level | Responsibilities | Salaries (USD) | Promotion time |
| Private equity analyst | Career Level | $100,000 – $150,000 | 2-3 years |
| Private equity associates | Leading deal processes from beginning to end Sourcing (generating new deal ideas) Financial modeling and due diligence Portfolio company monitoring | $160,000 – $300,000 | 2-3 years |
| Senior Associate | Similar to Associate but with more manager responsibilities. | $200,000 – $400,000 | 2-3 years |
| Vice President | Deal management Leading and mentoring team members Due diligence Negotiations | $260,000 – $550,000 | 3-4 years |
| Director/Principal | Decision-making Deal process management Deal sourcing Fundraising Negotiation facilitation | $550,000 – $800,000 | 3-4 years |
| Managing Director/Partner | Fundraising Deal origination Fund representation Deals review | $1,300,000+ | N/A |
Private equity firms typically require at least two years of experience as an investment banking analyst and don’t hire directly from college or business school. In fact, many analysts see private equity as the next step in their finance careers. This is because PE firms have better advantages, such as a higher compensation ceiling, unique investment strategies, and greater potential for career advancement.
Difference between investment banking and private equity
Even though both investment banking and private equity share the same goal of raising capital for investing purposes, they have different business models. Explore them in the following table.
| Criteria | Investment banking | Private equity |
| Primary function | Facilitates large financial transactions such as mergers, acquisitions, and IPOs. Provides advisory and capital-raising services. | Invests directly in companies by acquiring ownership stakes. Focuses on long-term value creation. |
| Role | Intermediary between companies seeking to raise money and investors. | A direct investor taking ownership positions in companies. |
| Timeframe | Short to medium-term, with a focus on completing transactions efficiently. | Long-term, typically involves holding investments for several years before exiting. |
| Risks | Limited financial risk as the bank acts as an intermediary. | Higher financial risk as it directly invests capital in companies. |
| Compensation | Fee-based (transaction fees, advisory fees) and sometimes a percentage of the transaction value. | Typically, management fees (based on assets under management) and a share of the profits (carried interest). |
| Involvement in operations | Limited involvement in the day-to-day operations of client companies. | Actively involved in the strategic and operational decisions of portfolio companies. |
| Exit opportunities | No direct ownership stake. | Exit strategies involve selling portfolio companies through methods like IPOs. |
| Focus | Focuses on deals and transactions. | Focuses on improving the performance of portfolio companies and creating value. |
| Typical clients | Corporations, governments, public and private companies, institutional and private investors, high-net-worth individuals. | Institutional investors, pension funds, wealthy individuals. |
| Buy-side vs. sell-side | Investment bankers work on the sell side, helping clients sell business interest to investors, particularly during IPOs or M&A deals. | Private equity investors work on the buy side, acquiring business interests for investors who have already provided funding. |
What kind of software is used to manage deals?
Here are software tools employed in various stages of deal processes in investment banking and private equity:
- Virtual data rooms (VDRs). A VDR is a secure online platform for storing and sharing confidential documents related to a deal – vdr for private equity or data room for investment banking. It facilitates information exchange, collaboration, and communication among relevant parties during acquisition due diligence processes.
- Financial modeling tools. These are specialized tools designed to help create detailed financial models and conduct complex economic analyses. IB and PE professionals rely on these models to make informed decisions regarding valuation, risk assessment, and strategic planning.
- Communication and collaboration platforms. Platforms, such as Slack or Microsoft Teams, are essential for facilitating communication and collaboration among team members working on a deal.
- Excel and PowerPoint. Excel is used for financial modeling, data analysis, and creating complex spreadsheets. PowerPoint is necessary for creating presentations and pitch books, which are crucial in both investment banking and private equity for communicating deal information to clients, investors, and other stakeholders.
Key takeaways
Let’s summarize:
- Investment banking (IB) is a division of a bank whose key services include M&A advisory and underwriting. The IB division shouldn’t be confused with investment banks, known as “bulge bracket banks,” which offer more services, like sales and trading, asset management, and commercial banking.
- Private equity (PE) involves direct investment in companies by acquiring ownership stakes. Private equity firms are investment businesses that create PE funds by pooling capital from institutional and accredited investors.
- Investment banking and private equity differ in their core functions, with IB acting as an intermediary in large financial transactions, while PE directly invests in companies.
- Software tools for deal management include virtual data rooms, financial modeling tools, communication and collaboration platforms, Excel, and PowerPoint.