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What Differs Private Equity from Investment Banking?

A comparison of private equity and investment banking

Investment banking and private equity both raise money for investments, but they do so in very different ways. Private equity firms assemble wealthy investors' money and search for opportunities to invest in other companies. Investment banks identify companies, and then they search the capital markets for strategies to raise money from the investing public.

banking investing

The primary goal of the specialized branch of banking known as investment banking is the creation of capital for other enterprises, governments, and other entities. For both institutions and individual investors, investment banks handle the selling of securities, mergers, acquisitions, reorganizations, and broker trades. Additionally, they create new debt and equity securities for a variety of businesses. Investment banks also offer issuers advice on stock issuance and placement. Consultants, banking analysts, capital market analysts, research associates, trading specialists, and many other individuals work in investment banking. Each calls for a specific level of education and experience.

A degree in finance, economics, accounting, or mathematics is a good place to start for any financial career. In fact, this may be all you need for many entry-level commercial banking positions like teller or personal banker. People who are interested in investment banking should give an MBA or other professional certifications considerable consideration.

Having strong people skills is extremely beneficial for any banking career. Even devoted research analysts spend a lot of time working in teams or offering advice to clients. Even though some occupations require more of a sales touch than others, it's crucial to be comfortable in a professional social setting. High levels of initiative and communication skills (explaining ideas to clients or other departments) are other essential traits.

Personal Equity

At its most basic level, private equity is ownership (represented by shares) in a company that is not publicly traded or listed. Private equity is a source of funding for investments that is provided by high-net-worth people and businesses. In order to take public corporations private and ultimately delist them from stock exchanges, these investors purchase shares of private companies or seize control of publicly traded ones. The private equity industry is dominated by major institutional investors, such as pension funds and sizable private equity firms backed by a group of authorized investors.

Because both venture capital and private equity relate to corporations that invest in businesses and exit by selling their investments through equity financing, such as initial public offerings, the terms are sometimes misconstrued (IPOs).  

Private equity and venture capital engage in various types and sizes of businesses, put down various sums of money, and stake various amounts of equity in the businesses they finance.

Buy-Side vs. Sell-Side

Investment bankers market business interest to investors, which is a function of their sell-side employment. Corporations and individual businesses make up the majority of their clients. When a business wants to go public or is negotiating a merger and acquisition agreement, it could ask an investment bank for assistance.

The buy-side is where private equity associates, on the other hand, work. On behalf of investors who have already put up the money, they buy business interests. Private equity firms may purchase controlling stakes in other companies and actively participate in management decisions.

Regulatory Obstacles

The world's first and only nation to compel the division of investment banking from commercial banking was the United States in 1933. The following 66 years saw a total separation between commercial banking activities like accepting deposits and disbursing loans and investment banking activity. As a result of the Gramm-Leach-Bliley Act of 1999, these obstacles were eliminated. Investment banks continue to be subject to rigorous regulations, most notably proprietary trading limitations imposed by the Dodd-Frank Act of 2010.

Similar to hedge fund investing, private equity has long been exempt from the majority of the laws that affect banks and publicly traded companies. A lax regulatory approach is justified by the fact that the majority of private equity investors are well-educated, wealthy, and capable of taking care of themselves. Dodd-Frank, however, granted the SEC permission to exert more regulation over private equity. The first regulatory body for private equity was established in 2012. The taxation of private equity operations and advisory fees have received particular scrutiny.