Difference between Private Equity and Investment Banking

Investment banking and private equity are firms which tend to deal with other people’s finances. However, both have their own place in the financial world, giving individuals various avenues to tap into the finance industry.

Private equity refers to the asset class which deals with equity securities. However, these securities are not traded on the stock exchange but will be a pool of investment made by many wealthy business people such as venture capitalists or angel investors. The work of a private equity firm is to maintain a standard which satisfies the needs and goals of each investor. They usually deal in investment strategies related to leveraged buyouts, distressed investments and mezzanine capital.

Investment banking deals with financial instruments, but unlike commercial banking, does not entertain deposits. They work is stretched far more widely than an equity firm, where they help clients trade securities for cash, or advise them on how to manage their asset portfolio such as mutual funds or pension funds.

Private equity firms tend to acquire substantial controlling interest in a company and then aim to maximize the value of their investment. For this reason, they have a more realistic or long term investment pattern in mind when compared to investment banks, which tend to deal with much more liquid assets, with little to no control in the operations of a business.

Private equity firms also have in mind an exit strategy when they eventually make a sizeable profit from a particular venture. Investment banks largely deal with debt and equity securities and aid companies in generating cash for mergers and acquisitions or through initial public offerings.

Private equity analysts have to deal with greater risk when compared to investment analysts as the former usually takes a greater amount of debt in order to finance deals.


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    Private equity

    It as an equity or capital invested in those companies which are not listed on the stock exchange. The capital can then be utilized for expansion, growth, acquisition or funding new technologies. The size of private equity firms has risen progressively over the past few decades.

    Image courtesy:konnectedadvisors.com

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    Investment banking

    It is a financial intermediary that assists individuals, corporations and governments in raising capital and dealing with a variety of financial services related to debt and equity securities.

    Image courtesy: smgworld.bu.edu

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