Private Equity vs Investment Banking: Key Differences, Pros, and Cons

The private equity (PE) and investment banking sectors are both involved in raising capital for a client for investment purposes. However, they do it quite differently.

This article breaks down the key differences between both fields and describes career opportunities for aspiring specialists. Read on to learn more about investment banking and private equity services, strategy, clients, regulatory environment, average compensation, and much more.

What is investment banking?

Investment banking is a financial branch that helps businesses raise money and make big financial decisions. It focuses on offering expert advice and support during complex financial transactions, such as mergers, acquisitions, and public offerings.

Instead of lending money like regular banks, investment bankers act as intermediaries between companies that need capital and investors who want to invest. They help structure deals, value businesses, and reduce financial risks.

Many investment banks tend to specialize in large-scale transactions and provide guidance throughout the deal process. Their goal is to make sure all parties involved understand the financial terms, legal obligations, and possible outcomes.

Main services offered

The wide array of advisory services provided by investment banks typically includes:

• Capital raising
  Helping businesses raise money by issuing equity securities or debt, often through initial public offerings (IPOs) or private placements.
  
• Mergers and acquisitions (M&A)
  Advising clients on buying or selling companies, including strategic fit, pricing, and negotiation.
  
• Valuation and financial modeling
  Creating detailed models to estimate a company’s value and predict future performance.
  
• Restructuring and risk management
  Assisting companies in reorganizing their finances, especially during financial distress.
  
• Market research and analysis
  Providing insights into financial markets to support investment strategy and planning.

These services are often delivered by highly trained professionals, such as an investment banking analyst or associate, who work on building financial models, preparing pitch books, and analyzing investment opportunities.

Clientele and deal types

Investment banks typically work with publicly traded companies, private companies, institutional investors, and even government entities. The clients are usually involved in large-scale, high-value deals where expert guidance is essential.

Common deal types include:

• M&A
• IPOs
• Private placements of securities
• Debt restructuring
• Cross-border transactions

Large firms, often called bulge bracket investment banks, usually handle the biggest transactions, while smaller boutique firms may specialize in specific industries or regions.

What is private equity?

Private equity is a type of investment where money is used to buy and grow private companies — those that are not publicly traded on the stock market. Private equity firms raise large amounts of money from institutional investors, pension funds, and high-net-worth individuals to invest in businesses they believe have strong growth potential.

Unlike investment banks, which focus on advising clients, private equity professionals focus on ownership. Private equity firms typically buy a company, improve its performance, and later sell it for a profit, often through a sale, merger, or IPO.

The main goal of a private equity investment is to create long-term value by actively managing and improving the businesses they own, often referred to as portfolio companies.

Main services offered

Private equity firms don’t just invest — they get involved in running the businesses they buy. Their services usually include:

• Acquiring companies

They use a combination of investor capital and their own funds to buy controlling stakes in businesses.

• Managing portfolio companies

After the acquisition, they work closely with company leadership to boost revenue, cut costs, streamline operations, and drive growth.

• Financial modeling and due diligence

They evaluate potential investments by analyzing financial data, market position, and risks to make informed decisions.

• Developing exit strategies

They plan for how and when to sell a company, aiming to maximize returns through methods like trade sales or IPOs.

• Capital raising

They regularly raise new funds from investors to support future acquisitions and expand their portfolio.

Clientele and deal types

Private equity firms tend to work with:

• Private investors
• Institutional investors, such as pension funds
• Business owners looking to sell their company or bring in a strategic partner

They target businesses of all sizes, but especially those with untapped potential. Typical deal types include:

• Buyouts
  Taking over a company completely, often through leveraged buyouts (LBOs)
  
• Growth equity
  Investing in fast-growing companies that need capital to expand
  
• Distressed investments
  Buying struggling businesses and turning them around
  
• Secondary buyouts
  Selling one portfolio company to other PE firms

In short, private equity firms operate by buying companies, improving them, and selling them for a profit. This makes them a powerful part of the investment business, with a focus on long-term value and strategic growth.

Data rooms for PE

Overall rating:

The score is calculated as an average, derived from evaluations and the number of reviews on external review platforms.

4.9/5

Excellent

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Overall rating:

The score is calculated as an average, derived from evaluations and the number of reviews on external review platforms.

4.8/5

Excellent

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Overall rating:

The score is calculated as an average, derived from evaluations and the number of reviews on external review platforms.

4.7/5

Excellent

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Key differences between private equity and investment banking

Let’s now take a look at the main investment banking vs. private equity differences. 

Ownership

Investment banks do not take ownership. They offer advisory services for financial transactions, such as mergers or raising capital, but they don’t invest in the companies themselves.

In contrast, private equity firms buy companies using a mix of investor money and their own funds. They aim to improve these businesses and later sell them for a profit. This makes them active owners deeply involved in strategy and daily operations.

Revenue models

Investment banks tend to earn money from fees charged for their services. Their revenue depends on the number and size of the deals they complete.

In contrast, private equity firms typically make money through:

• Management fees from the private equity funds they manage
• Carried interest, which is a share of the profits when they successfully exit a deal

Risk profiles and time horizons

Investment bankers typically have a shorter time horizon. Their work is project-based, focused on closing deals in weeks or months, so the financial risk is more about market volatility and deal execution.

Private equity investors take on more risk because they tie up money in portfolio companies for years. They work to increase value before exiting, usually after 5 – 7 years.

Regulatory environment

In 1933, the U.S. investment banks and commercial banks were legally separated. It ended in 1999 with the Gramm-Leach-Bliley Act. Today, investment banking remains highly regulated, particularly under the Dodd-Frank Act of 2010, which introduced stringent rules governing proprietary trading and risk management.

In contrast, the private equity industry is generally less regulated because it works with wealthy, experienced investors who are expected to manage their risks. However, this changed after the Dodd-Frank Act of 2010, which introduced more oversight. In 2012, the first U.S. regulatory agency focused on private equity funds was created to increase transparency and compliance.

Deal side

Investment bankers are usually on the sell-side, helping companies find buyers or raise funds. They create presentations, identify investment opportunities, and negotiate terms.

Private equity firms, meanwhile, are on the buy-side. They evaluate potential investments, perform due diligence, and acquire businesses to hold and grow.

Culture

Investment banking is fast-paced, highly structured, and intense. Long hours and tight deadlines are common, especially for junior roles like an investment banking analyst.

Private equity firms offer a slightly better work-life balance and a more strategic environment. Private equity associates and private equity analysts spend more time on deep research, performance tracking, and working directly with managing portfolio companies.

Strategy

Investment banking focuses on helping clients complete a transaction successfully. The strategy is short-term: structure the deal, close it, and move on to the next one.

In contrast, many private equity firms have a long-term investment strategy. They don’t just close deals, they look to transform and grow businesses, often over several years. Each private equity firm builds an investment thesis around how it can improve a company and create value over time.

Career paths and work environments

Let’s explore what kind of work, career prospects, and compensation you can expect when getting into each sector.

Investment banking

A career in investment banking offers high earnings, challenging work, and strong growth potential. Professionals in this field often specialize in areas such as capital markets, financial analysis, equity securities, and mergers and acquisitions.

Private equity

A job in private equity offers the chance to work closely with businesses, helping them grow and become more valuable. A private equity education required for specialists to get into the field is similar to that of investment banking. However, you’ll also need previous work experience.

What are the pros and cons of private equity investment vs. investment banking?

Now, let’s take a brief look at the main advantages and disadvantages of each investment field.

Investment banking

Private equity investment

Role of virtual data rooms in both fields

Virtual data rooms (VDRs) are secure online platforms used to store and share confidential documents during complex financial deals. 

Both private equity firms and investment banks use VDRs during due diligence to give buyers, investors, and legal teams controlled access to key business files. 

Here are the main benefits virtual data rooms can bring to both investment bankers and private equity investors:

• Secure access to confidential data
• Easy sharing of financial, legal, and operational documents
• Full control over who can view, download, or comment on files
• Activity tracking for better compliance and transparency
• Effective collaboration between all parties involved in the deal
• Faster decision-making during financial transactions

Note: Explore the selection of top virtual data room providers on the market to choose the one that will suit your PE or investment banking needs the best.

Final thoughts

Although private equity and investment banking are both involved in raising capital for investment, they are different.

Investment bankers advise clients and help raise money, while private equity professionals buy companies (or a share in them) and work to grow them. Each field offers strong salaries, valuable skills, and unique career paths. Choosing between them depends on your interests, background, and long-term goals.

With tools like virtual data rooms, you can make the investment banking and private equity job even easier and more effective.