Private Equity vs Investment Banking: Difference and Comparison

Growing companies approach investment banks for the sole purpose of funding. It can also be said that investment banks suggest companies for funding-related queries.

You are digging deep into the business model in the private equity model. People employed in private equity are inclined towards one sector.

Many people go from investment banking to private equity, and many parts of these two worlds are similar. But there is a big difference; investment banking is very execution heavy. When working in investment banking, you are very client-facing (client-focused work).

Some of the largest investment banks in the world are:- Barclays Capital, Citi Bank, J.P Morgan, Credit Suisse, .etc.

Key Takeaways

1. Private equity refers to investments made in privately held companies by private equity firms or investors. In contrast, investment banking is a financial service that helps companies raise capital through underwriting or issuing securities.
2. Private equity firms are involved in managing the companies they invest in, while investment banks facilitate financial transactions for their clients.
3. Private equity and investment banking are both important in finance but have different functions and goals.

Private Equity vs Investment Banking

A private equity corporation is also called an investment management company. The investment in a private company is private equity. These firms help people in starting a new business. Investment banks help companies in raising their finances. Investment banks also provide consultation services. Investment banks provide advice related to asset management.

Private Equity, in some people’s minds, can be defined as a process of raising money and investing it in companies to perform better and gain a good return on that investment.

Investment banking is the engine room of the economy. It essentially focused on creating capital for the companies, government, etc.

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Comparison Table

Parameter of Comparison	Private Equity	Investment Banking
Implication	Being cheerful about private equity’s long-term prospects may not seem easy. Private equity firms will face difficulty in performing in the future with low funds.	Due to the boom in the IT sector, technology has brought changes in the primitive procedures of funding companies for growth, which has raised questions about the future of investment banking.
Importance	Private Equity firms are a type of company working as an investment management company.	Investment banks also act as a link between investors and the company.
	They help growing companies to help raise funds or help an individual to start a new startup.	The return rate from investment banking is greater than banks offer savings accounts.
Main features	In Private Equity, early withdrawal is impossible .it acts as an LP (Limited Partnership)	Investment Banking provides · Debt Finance · Equity Finance · Derivates
History	After World War II, people started taking an interest in earning through buying and selling property or goods for profit. That evolved into modern private equity.	In mid-1970, the largest government bank of India, SBI, entered into this business and by the 1980s, more than 29 banks were established in this sector.
Advantages	· The most significant advantage of Private equity is Cash Infusion. · It offers high returns based on investors’ knowledge.	· A person investing in Investment Banks can predict the amount of money he will receive in the future. · The fluctuation of the price of the assets is often very minimal.

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What is Private Equity?

Private Equity can be defined as a process of raising money by one or more people and investing it in the companies for them to perform better and gain a good return on that investment.

In Private Equity, the amount of gain one will be getting from the established investments in the assets can not be determined in the present. Therefore it has a risk of a fluctuating market.

The following are some of the perks of investing in Private equity versus Listed Equity:-

Private Equity

1. Low liquidity
2. Long investment horizon
3. High active involvement
4. Low market efficiency
5. No published information
6. Low regulatory oversight

Listed Equity

1. Strong liquidity
2. Short or long term
3. Little active involvement
4. Higher market efficiency
5. Published information
6. Highly regulated

Some of the reasons why companies seek Private Equity Funding are:-

1. Buy-Out Shareholders to Restructure Ownership & Management
2. Increase Working Capital Base
3. Business Expansion & Development
4. Develop New Products to Grow/Remain Competitive
5. Finance Acquisitions of Other Businesses

Private Equity firms help small companies raise new funds for their new or existing projects facing difficulties in the Finance sector. And these firms help new startups to raise money for their projects, and they get repaid when the project starts wielding income,

 

What is Investment Banking?

Investment banking is a field of banking that helps small or even large companies raise finance. In addition to this, investment banking also offers expertise for various transactions a company may be facing.

One of the significant roles of Investment Banking is to provide a large amount of consulting.

With the help of this expertise, companies do not face many difficulties in raising finance from a new source or generating finance from themselves.

The rate of return from investment banking is more significant than banks offer a savings account.

They keep their eyes on the market trends and give directions on when to make public offerings and how to manage the assets.

Unlike commercial banks, Investment banks do not take initial deposits from their customers.

The two main streams of business in this sector are:-

1. Trading securities for cash or other securities.
2. Promotion of assets/securities.

The following are the largest full-service global investment banks;

1. Bank of America
2. Barclays Capital
3. BNP Paribas 8
4. Citigroup
5. Credit Suisse
6. Deutsche Bank
7. Goldman Sachs • JPMorgan Chase

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Main Differences Between Private Equity and Investment Banking

1. The main difference between Private equity and investment banking is that in Investment banking, the central part of their job is to provide a vast amount of Consulting. In contrast, in Private Banking, no consulting is offered to its customers.
2. In Private Banking, the returns that are to be generated in the future can not be determined at present. In contrast, the returns rendered in Investment Banking can be determined today.
3. Investment banking helps raise finance, whereas Private Equity is a business in the investing sector.
4. The most crucial advantage of Private Equity is Cash Infusion. In Investment Banking, the most critical advantage is that it provides expertise in various transactions a company may face.
5. In Investment Banking, no prior money in the form of a deposit is taken from its customers, i.e. companies or individuals. Private equity is a business, and a certain amount is charged by its customers.

References

1. https://www.hbs.edu/faculty/Pages/item.aspx?num=35877
2. https://www.aeaweb.org/articles?id=10.1257/jep.23.1.121
3. https://2ndave.nyu.edu/bitstream/2451/26535/2/FIN-01-006.pdf