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Private Equity Investment vs. Investment Banking

Marsha Lewis
VP of Marketing at DealRoom

When it comes to investing your money, you want to understand as much as you can.

But there is a lot to know, things like: what's the difference between private equity investment and investment banking?

We at DealRoom work a lot with both bankers and private equity firms by providing them a deal lifecycle management platform for deals executing and in this article, we will explore the answer to this and other pertinent financial aspects. As we have some expertise in this question.

Let's start with explaining what is provate equity and investment banking. Btw if you need a quick answer - just scroll to the bottom.

What is Private Equity?

Private equity is a type of private capital investment which is concerned mainly with ownership capital or shares that are not publicly listed or traded. It is usually established through private equity firms and often times has to do with the buyout of or investment in companies.

Today, private equity firms are some of the most powerful and influential players in the finance industry and many investors are clamoring for private equity investment opportunities.

Investors create private equity by raising capital from other investors and then using that money to invest in private companies.

That capital is put to a variety of uses ranging from straightening out balance sheets to mergers and acquisitions, research and development, and for use in special projects like the development of a new product or service.

One of the main uses of private equity is buying out companies that are struggling financially and then either helping them turn things around with financial and managerial restructuring or partitioning them off and selling them for a profit.

This is called equity investment management.

Pension funds, government organizations and private companies all invest in private equity.

But only when they have access to a large amount of capital because, typically, minimum investments in private equity range from the mid $200,000 to several million dollars.

As a result, most of those involved in private equity are either accredited and or institutional investors.

How do Private Equity Investors Make Money?

Private equity funds work by pooling their money together to buy majority shares in, usually, large public companies. These equity investments are called “leveraged buyouts” (LBOs).

Once a private equity firm gets control of a company there are several things that can happen.

One is that the company receives an influx of working capital that it can use for new projects or development, and along with that usually comes some corporate and financial restructuring.

In this case, a private equity firm would make money by increasing the value of the particular company it acquired.

So what is good for the company is good for the firm and what is good for the firm is good for the individual investors.

Another possibility is that after an equity investment the private equity firm does very little to change the day-to-day operations of the company it acquired because, in some cases, the company is already running well and was acquired for other reasons.

The final option is that the company is effectively broken up and sold for a profit.

One big benefit of being part of a private equity fund is that you can make a private investment in public equity. This means you and other members of your equity fund, can purchase shares in a publicly traded company outside of a public offering in a stock exchange.

Understanding the Private Equity Due Diligence

Before deciding to invest in or buy a privately held company, there is an extensive private equity investment due diligence checklist to go through.

Here are some of the categories that need to be researched:

  • Intellectual Property: copyright, trademark, patents, and trade secret documents
  • Contracts and Agreements: copies of renewable supply/services, mortgages, joint venture projects, marketing projects, professional providers, retirement pension plans, and lease agreements
  • Corporate Documents: corporate by-laws, minute books, treasury shares, dividends plans, and stock books and ledgers
  • Employee Benefits: copies of safety and hazards reports, non-government regulatory agencies, licenses, permits, and material safety data sheets
  • Financial Information: copies of current large contracts, projected financial information, sales reports, and yearly financial statements and more.
Private Equity Due Diligence Checklist

Private Equity and Venture Capital

Venture capital funds are similar to private equity.

They are the same in the fact that they both function by pooling money from investors and using that money to purchase shares in companies.

There are, however, some differences between them.

For example, private equity firms usually take over complete control of the companies they get involved in, meaning they purchase 100% of its shares. This is not necessarily true of venture capitalists.

Private equity firms also take on a more active role than other investment groups, and because of their high minimum investments are comprised of higher-net-worth individuals.

Finally, venture capitalists will sometimes invest in earlier stage companies and participate in seed or series A funding.

Private equity firms usually stick with more established companies that either need access to capital or which are suffering due issues with management.

What is Investment Banking?

Investment banking has to do with managing money from large companies. Investment banks do this by helping companies with mergers and acquisitions, manage capital, and or underwrite debt. Invest banks can also help companies do things like issue stock.

In short, investment banks operate as a way for large entities—whether they be corporate or governmental—to make big financial decisions.

These can include going public, making changes to management or the structure of the company, issuing new classes of stock, and the like.

Investment banks are also typically involved in helping companies with mergers and acquisitions.

For their part, investment bankers earn their commissions in a number of ways including via helping the companies they represent sell shares in public and or private capital markets.

How are Investment Banks Organized?

Investment banks offer four primary services. These are mergers and acquisitions, equity capital markets, leveraged finance, and restructuring.

investment banks organization
  • Mergers and Acquisitions, M&A: Investment banks oversee, manage, or advise executives on the merger or acquisition of companies.
  • Equity Capital Markets, ECM: This type of investment bank specializes in advising and managing companies as they go public and do things like issue stock, have an IPO, etc.
  • Leveraged Finance, LevFin: Some investment banks will issue high-yield debt which companies can use as capital for new projects or other activities.
  • Restructuring: Companies will hire investment banks to help them restructure and reorganize.

What is the Difference Between Private Equity and Investment Banking?

  • Private equity vs. investment banking, which is better?
  • Should I chose private equity or investment banking?

These are age old financial questions that are dependent on the individual circumstances of the investor.

The first thing to understand, though, is that both investment banks and private equity firms have their sights set on the same goal: maximizing profits for investors.

But they do so from different directions.

While private equity raises money among high-net-worth individuals and uses the money to buy businesses, investment banks find money for the businesses by raising it in capital markets.

  • Private Equity: In private equity, you are like a real estate investor. You buy properties, make improvements and then flip them for a profit. The key is that private equity firms do this with very large “properties.”
  • Investment Banking: Investment banks are like realtors (i.e. real estate agents) who represent the properties (i.e. the businesses). They make their commissions by helping businesses buy and sell and raise capital.

Because private equity is on the buy side, associates will purchase shares in a company on behalf of investors who have already put up the money.

And they will often buy either all or, at least, a controlling interest in the companies they invest. This is why private equity due diligence is so important.

Private equity associates have to do a tremendous amount of research during PE due diligence to ensure they invest in the right companies at the right time.

Private equity due diligence questions cover just about everything and, ideally, they are very incisive.

Another notable difference is that private equity investment periods are longer than those associated with investment banks. If you invest in a private equity fund it may, therefore, take longer to see a return on your investment.

Investment banks, on the other hand, are on the sell side of the transaction. For investment bankers, their typical clients are corporations and or private companies.

When it comes to investment management vs private equity, companies looking for a more hands on type of investor will usually go with private equity.

Both private equity and investment banking involve complex workflows and processes, whether sell or buy side. Teams utilize private equity software and an investment banking data room to manage deals.

Careers in Investment Banking vs. Private Equity

When it comes to investment banking career versus private equity career, there is an even greater difference between the two.

In movies and on TV, the typical Wall Street person who works crazy hours and gets stressed out over the DOW Jones is an investment banker.

Private equity associates are usually older individuals who started out and were successful in investment banking in their earlier years.

While there is sometimes quicker money to be made in investment banking, usually associates in private equity have higher salaries and make more in the long term.

Investment bankers do a number of things, but they spend most of their time one, pitching deals two, executing those deals and three, doing administrative work like research, managing the investment banking data room like DealRoom, sending emails, networking potential leads, and the like.

Private equity associates do things like meet and screen potential investors, analyze companies and find new investment opportunities, help manage and organize portfolio companies using private equity software, help raise capital and, once all that is done, they help execute exit strategies.

Namely, selling the companies they bought out for a profit.

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