Difference Between Private Equity and Investment Banking (With Table)

Private Equity vs Investment Banking

Investment banks are usually approached by growing companies for the sole purpose of funding.it can also be said that investment banks suggest companies on the funding related queries.

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

A lot of people go from investment banking to private equity, a lot of parts of these two worlds are similar. but there is a big difference, investment banking is very execution heavy. when you are working in investment banking, you are very client-facing ( client focuses work).

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

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

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

It is also essential to understand the difference between a Private Equity and Investment Banking as they are using interchangeably by many people.

The main difference between Private Equity And Investment Banking is that Investment Banking mainly acts as a consulting and advisory firm whereas Private Equity acts as a profit-making firm in the field of investment.


Parameter of ComparisonPrivate EquityInvestment Banking
ImplicationIt may seem hard to be cheerful about private equity’s long term prospects. Private equity firms will face difficulty in performing in the future with a low level of 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.
ImportancePrivate 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 what banks usually offer a savings account.
Main featuresIn Private Equity, early withdrawal is impossible .it acts as an LP (Limited Partnership)Investment Banking provides
· Debt Finance
· Equity Finance
· Derivates
HistoryAfter World War II, people started taking interest in earning through buying and selling property or a good for profit. That evolved into the modern private equityIn mid-1970,the largest government bank of India, SBI entered into this business and by 1980s more than 29 banks were established in this sector.
Advantages· The biggest 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 is going to receive in the future.
· The fluctuation of the price of the assets is often very minimal.

 

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
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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 to raise new funds for their new or existing projects which are 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,

Private Equity
Private Equity
 

What is Investment Banking?

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

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

With the help of this expertise companies not face many difficulties in raising finance from a new source or even generate finance from itself.

The rate of return from investment banking is greater than what banks usually 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 its 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
Investment Banking
Investment Banking

Main Differences Between Private Equity and Investment Banking

  1. The main difference between Private equity and investment banking is that in Investment banking, the main part of their job is to provide a huge amount of Consulting whereas in Private Banking no consulting is provided to its customers.
  2. In Private Banking, the returns that are to be generated in the future can not be determined at present whereas the returns generated in Investment Banking can be determined at the present day.
  3. Investment banking helps in the process of raising finance whereas Private Equity is a business in the investing sector.
  4. The most important advantage of Private Equity is Cash Infusion. Whereas in investment Banking the most important advantage is that it provides expertise in a variety of transactions a company may be facing.
  5. In Investment Banking, no prior money in the form of deposit is taken from its customers i.e companies or individuals, whereas Private equity is a business and a certain amount is charged from its customers.

 

Learn More With the Help of Video


 

Conclusion

There are so many companies and individuals who are facing difficulty in raising new funds for either expanding their business or raising new funds for startups. Investment Banking helps its clients to raise funds by consulting them when to make public offerings (IPO) and how to control assets. And Private Equity is a business in investing in which people come together and pool some money to buy an asset and they make a profit of that asset by selling that for a higher price. These two are methods where a large amount of money is required for generating profits.


 

Word Cloud for Difference Between Private Equity and Investment Banking

The following is a collection of the most used terms in this article on Private Equity and Investment Bankingould help in recalling related terms as used in this article at a later stage for you.

Difference Between Private Equity and Investment Banking
Word Cloud for Private Equity and Investment Banking

 

References

  1. https://www.hbs.edu/faculty/Pages/item.aspx?num=35877
  2. https://academic.oup.com/rfs/article-abstract/24/7/2462/1626498
  3. https://www.aeaweb.org/articles?id=10.1257/jep.23.1.121
  4. https://2ndave.nyu.edu/bitstream/2451/26535/2/FIN-01-006.pdf

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