Investment Banking vs Private Equity: Should You Start on the Buy-Side?
“All that glitters is not gold.” (The Merchant of Venice, Act II, Sc. 7) One of our most frequent queries is “investment banking vs private equity” – perhaps in second place only to “investment banking vs private equity vs hedge funds.” The key questions are usually:
- If you have the opportunity, does it make sense to start out in private equity, or at a hedge fund, rather than in investment banking?
- Is there any point of staying in investment banking rather than moving to private equity or hedge funds?
We covered the second point in the article on investment banking exit opportunities, so we will focus on the first point here. And we’ll start by looking at how these fields differ and the usual arguments for and against starting out on the buy-side:
Investment Banking vs Private Equity: The Differences
Just in case you haven’t already read the dozens of articles about this topic, the basic differences are:
- Investment Banking: You are like a real estate agent, but for businesses rather than properties. You represent companies and help them buy, sell, or raise capital, and you earn a commission when they do so.
- Private Equity: You are more like a real estate investor, buying homes and commercial properties, improving them, and then selling them again in a few years to earn a profit – but you do this with large companies rather than properties.
You can earn a lot of money if you’re successful in either field, but the ceiling is far higher in private equity for the same reason the ceiling is higher for real estate investors than it is for brokers: if an asset’s price increases by 2x, 5x, or 10x, the investors reap all the gains (see: more the private equity career path). By contrast, if you’re a broker or an investment banker, you earn commissions that are a small percentage of the selling price, no matter how well or poorly the deal performs afterward. Undergraduates often start as investment banking analysts and then use the experience to move into other fields (“exit opportunities”), such as private equity, hedge funds, and corporate development, after a few years.
Buy-Side vs Sell-Side: The Usual Arguments, and What Has Changed Over Time
In the buy-side vs sell-side debate, people often argue that it makes more sense to start on the buy-side at a private equity firm or hedge fund for the following reasons:
- The work is far more interesting and intellectually engaging – you’re investing and finding holes in companies’ business models rather than changing the font colors on slides or fixing printers.
- The only point of investment banking is the exit opportunities – and if you can already access one of the best exits, why bother with IB first?
- The lifestyle is better, and you get more free time on weekends since there is less pressure to do deals constantly.
- The compensation ceiling is significantly higher, and you position yourself to become a top earner by starting in private equity and advancing over time.
Over the 10-15 years following the financial crisis, a few additional arguments have arisen:
- More private equity firms have been recruiting undergrads and offering them internships and even full-time roles (and interviews are pretty similar to investment banking interviews, so not much additional prep time is required).
- Recruiting at all levels starts much earlier, so you won’t have much time to “experiment” with different fields… what do you have to lose by going directly into PE?
- The top banks have become less prestigious compared with tech companies, and compensation is similar, if not lower – so, why not just go directly into PE?
Buy-Side vs Sell-Side: Why You Should Be Careful About These Arguments
These points above are not wrong, but they are misleading because “the buy-side” and “private equity” and “hedge funds” are huge generalizations. For example, suppose that you’ve interviewed around and won the following two buy-side offers right out of undergrad:
- Opportunity #1: Analyst at Silver Lake, one of the top private equity funds in the world (over $40 billion AUM), where you’ll assist the post-IB Associates with deal execution.
- Opportunity #2: Analyst at Dollar Dial Capital, a brand-new $100 million AUM private equity fund, where you’ll focus on “sourcing,” i.e., cold calling companies to drum up business.
Technically, these are both “private equity offers,” but anyone with a pulse would realize that opportunity #1 is in a completely different league than opportunity #2. You could make a good case for accepting the Silver Lake offer over IB offers from top groups at bulge brackets and elite boutiques, but you’d be crazy to accept the Dollar Dial Capital offer over top BB and EB offers. That’s the TL;DR argument against the notion that buy-side roles are universally better: some buy-side roles may be better, but there’s huge variability among different firms and roles. But let’s go beyond that and look at each argument made above for investment banking vs private equity:
Investment Banking vs Private Equity: The Work Itself
Work in investment banking consists of three main tasks: pitching for deals, executing deals, and “random tasks” such as finding information, delivering packages, and helping MDs prepare for calls. By contrast, work in private equity consists of screening for potential investments, executing deals to make those investments, managing portfolio companies, fundraising, and helping to sell portfolio companies (exit strategies). There are fewer “random tasks,” and even when you work on a deal, you spend more time thinking critically about a company’s quality as an investment rather than the process around the deal and how to spin the company into seeming amazing. For example, you’ll poke holes in the CIMs sent over by bankers, you’ll challenge management’s projections, you’ll do your own research by speaking with industry experts, and you’ll request data from bankers to back up their claims. So, it’s an easy win for private equity in terms of “more interesting work,” right? Well… not so fast. One problem is that the description above corresponds to what post-investment-banking Associates at mid-sized-to-large firms do. If you get hired straight out of undergrad, you come in as an Analyst, and you have far less autonomy (see our coverage of Private Equity Analyst roles). No matter how brilliant you are, you are simply not prepared to manage entire deal processes if you just graduated from university. You’ll miss problems that would be common sense to anyone who’s completed several deals, and you’ll lack “soft skills,” such as the ability to extract information from executives who don’t like you. You’ll often be more of an assistant to the Associates, and if you’re at a smaller firm, you could end up doing a lot of “sourcing” to find companies. Some people don’t mind this, but many others dislike it and just want to work on deals. Also, there is still plenty of “selling” involved in the job – if you come up with a good idea, you’ll have to pitch it to the investment committee, lenders, and your firm’s Limited Partners. And while you may try to “improve portfolio companies’ operations,” you tend to do so at a very high level; you won’t understand the company to the same extent as a founder or executive who is in the weeds all day. So, the work in private equity is generally more interesting, but that’s not universally the case, and it comes with the caveats above about your title, role, and the firm size.
Investment Banking vs Private Equity: What’s the Point?
People often argue that the only point of working in IB is to win exit opportunities. By contrast, you enter a field like private equity because you want to stay in it for the long term, advance up the ladder, and eventually become wealthy as a Partner or Managing Director. So, why bother with banking if you don’t have to? But there’s a simple counterargument here: you get more out of banking, at least at a large bank, than just the exit opportunities. For example:
- You gain access to a wide professional network since banks employ so many people; even the largest PE firms are smaller by an order of magnitude.
- You get more training from repeated deal execution. It’s just like weight-lifting at the gym: reps, reps, reps, and more reps. You’ll look at a lot of deals in PE but pass on 99% of them quickly, so you’re less likely to close many deals.
- Perhaps most importantly, you get the brand name of a large bank if you work there first. Everyone worldwide knows Goldman Sachs, but most people outside the finance industry have never heard of KKR or Blackstone, let alone top middle-market funds such as ABRY.
Also, you’ll still have access to more and better opportunities if you work in IB first and then go through the on-cycle private equity recruiting process. Do these points matter? If you’re 100% set on private equity for the long term, no, not really. But if you’re not sure of your long-term goals, or you might want to work outside of finance in the future, starting at a large bank gives you more options.
Investment Banking vs Private Equity: Lifestyle
People also like to argue that the “lifestyle” in private equity is better, meaning that you work less than investment banking hours. Therefore, you get more of a social life, and you can make plans and take weekend trips. If you look at the “average” PE firm, this is true: you won’t be at the office as much as in investment banking, where 70-80+ hours per week are still the norm. That said, it is not the case at the mega-funds (KKR, Blackstone, etc.), where hours can be even worse than in banking. Also, regardless of the firm size, if you’re working on a deal that’s nearing its final stages, expect late-night and weekend scrambles and just as much stress as in IB deals. The main advantage of private equity is that you don’t pitch for deals in the same way, which means you don’t waste time and effort creating pitch books and revising them 578 times. Finally, keep in mind that “better hours” doesn’t mean a 40-hour workweek; it just means, for example, 55-65 work hours per week rather than 70-80.
Investment Banking vs Private Equity: Salary and Bonus Levels
The usual argument here is that since the upside in private equity is unlimited, the compensation ceiling is much higher. This point is true at the senior levels, but it ignores how the floor and the average case compare to investment banking salaries and bonuses. In banking, 1st Year Analysts tend to start with base salaries just under $100K, with total compensation rising to the ~$150K range depending on bonuses. It moves closer to $200K for 3rd Year Analysts, and total compensation for Associates ranges from $250K to $400K, with total compensation for VPs in the $450K to $700K range, and MDs in the high-six-figure-to-low-seven-figure range. People often see these figures and say, “Aha! Private Equity Associates earn $300K+! You earn more money by working in private equity! It’s a big jump from IB Analyst pay!” Here’s what’s wrong with this logic:
- Yes, Associates at mega-funds earn that much. But Associates at middle-market and smaller firms earn far less – sometimes, total compensation is lower than that of IB Associates.
- Analysts at all types of private equity firms earn significantly less than Associates, just as Analysts in IB earn significantly less than Associates. In fact, PE Analysts often earn less than IB Analysts! So, you might initially make less money if you start in private equity.
The real pay advantage in private equity comes from carried interest (“carry”), which usually becomes available only as you move up to the VP / Principal and the MD / Partner levels (for more, see our overview of private equity salaries, bonuses, and carried interest). And if you don’t stay to see the long-term results of your deals over many years, you won’t receive the benefits of carry. The bottom line is that yes, the pay ceiling is higher in private equity, and there are MDs and Partners who earn many times – sometimes hundreds of times – what MDs in banking earn. But there isn’t necessarily that big a difference in junior-to-mid-level roles unless you happen to get carry and then participate in deals that perform very well. And remember that it’s also (arguably) harder to get promoted to the mid and top levels in private equity – turnover is lower, more people want to stay in it for life, and the long-term incentive structure makes people reluctant to leave.
Investment Banking vs Private Equity: Exit Opportunities
The article on investment banking exit opportunities covered this one in-depth, but in short: investment banking can lead to a wide variety of exits, including private equity, venture capital, growth equity, hedge funds, asset management, corporate finance, corporate development, tech startups, and more. By contrast, your options are a bit more limited coming from private equity just because PE firms themselves are less well-known outside finance. For example, if you recruited at a Fortune 100 company after working at Goldman Sachs, you would get a bonus for the GS brand name; you might even win interviews just because of that. But if you started at a top PE firm right out of undergrad, the Fortune 100 company might not even know the firm that well, or at all – so you wouldn’t get much of a brand bonus. That said, private equity still offers good exit opportunities; they’re just not quite as broad as the ones offered by investment banking because of this branding issue. I would also argue that private equity offers much better exit opportunities than hedge funds, where you could easily get pigeonholed if your fund follows a very specific strategy. This is also why it tends to be easier to move from private equity to hedge funds than to do the reverse (plus, the lack of deal experience). For more on this one, see our coverage of the hedge fund vs private equity question.
Investment Banking vs Private Equity: What to Do?
There are solid arguments on both sides of the “starting out in investment banking vs private equity” question. But I’d say the real answer comes down to your certainty over your long-term goals and how good the firm and offer are. I would recommend starting in a buy-side role right out of undergrad only if:
- You are very certain that you want to stay in PE (or HF/AM) for the long term, and you’ve completed multiple internships to confirm this; and
- You have an offer at a well-known, established firm – not a startup fund with $100 million in AUM; and
- You will be working on real deals (or real investments on the HF/AM side) – not cold-calling companies all day or being a glorified assistant; and
- You will be working at a firm where there’s a clear path to promotion as an Associate, not one where Analysts get shown the door after ~2 years.
If all those are true, sure, accept the buy-side offer. But if not, proceed with caution in this ongoing investment banking vs private equity debate. All that glitters is not gold – even if your offer seems quite shiny.
Take a look at Is Finance a Good Career Path? or my review of the The Way of the Wall Street Warrior or Investment Banker Salary and Bonus Report or Private Equity Salary, Bonus, and Carried Interest Levels: The Full Guide.
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Hi Brian. I heard that in a mega fund, that if you start as an analyst, it is harder for you to get promoted to associate versus an applicant from BB investment banking M & A who is applying for associate, is that true?(I want to work in PE for sure)
Yes, this is generally true (even at non-mega-funds). See the PE Analyst article for more.
In the second example for getting more out of IB than exit opportunities (in the section “What’s the point?”), I don’t see much difference between doing the grunt work for many deals that don’t get close (in IB) and doing the research and due diligence for many investment opportunities that are eventually discarded.
In addition, how does fixing slides and reviewing spreadsheets give you relevant “training” to apply in as a PE associate?
Thanks in advance,
P.S. the link in “so you’re less likely to close many deals” is for deals in IB and not PE. I don’t know if it was intended or not, but by the placement used one thinks it is for PE deals.
One of the differences is that a higher percentage of the deals you work on in IB will close. By contrast, ~99% of potential deals in PE are rejected fairly early on, and even among the ones that advance further, the failure rate is probably higher.
If you think that you’ll be doing something much different than fixing slides, reviewing spreadsheets, and building models as a PE Associate, then I think you might not have a clear understanding of the industry and what you do as a junior-level employee. It’s a very similar job, but with more responsibility and less hand-holding. But if you find PPT and Excel fundamentally boring, you’re also not going to like PE.
But does closing a deal matter that much when you’re working as an analyst? Because an analyst would analyze that deal no matter if it failed in the future or not.
Also, if the analyst/associate job is so similar between IB and PE, why do PE funds almost only hire people from IB?
It does matter because you tend to get more “credit” for closed deals. It also sounds like you accomplished more, even though you probably had nothing to do with the deal closing. But perception trumps reality in recruiting in a lot of cases. Traditionally, PE firms have recruited mostly from investment banks, but more firms are beginning to hire students directly out of undergrad.
The idea was to make sure people are trained in accounting/Excel/PowerPoint/valuation/modeling and then give them more “real work” in PE. But in a lot of cases, firms can also train people internally.
Hey Brian, I am currently considering between an AM offer at a large fund with more than €500bln in AUM where I would be doing a mixture of equity research and PM track work, and an offer from an Elite Boutique investment bank that would include a mixture of M&A and restructuring. Both offers are for the London office. Given my ambition of eventually becoming a HF PM, which offer do you think I should take? I have no preference about what type of hedge fund I want to end up in, any large bottom-up hedge fund would be great.
I responded to your original comment on the other post:
“If you are 100% certain you want to stay in the hedge fund/asset management world, and this large fund is reputable with well-established promotion paths, I’d say the AM offer is better. The only real advantage of starting out in banking is that you get a better brand name and network if you’re at one of the bulge brackets, but those same advantages don’t quite exist for elite boutiques. “
Thank you so much for your reply Brian! And so sorry about missing your original reply. Would it be possible to reveal the actual name of the fund to you in private chat so that you can give me a quick evaluation of how good the company is in terms of promotion paths (I will also name the Elite Boutique which will help)? Just two lines from you would help me greatly. The current employees of the company are very secretive and there is a lot of pressure to reveal as little as possible. I am also willing to pay for this service was it necessary, all I would want is really two lines on the AM fund versus the specific EB, I am sure that after your long experience and multiple conversations you will provide me with a comprehensive answer and help me make a correct decision. Thank you in advance
That is not something we do because there is about a 0.1% chance that I can tell you anything useful about the AM firm because we don’t track individual firms that much, and outside of banks, we *really* don’t track individual firms that much. If you want information, look on LinkedIn find people who worked at this AM firm, left, and have been doing other things for a few years, and then contact them via email to ask for their quick thoughts. That takes time/effort, but it’s the only way to get good results… don’t trust people online, review sites, etc.