Difference Between Private Equity and Investment Banking

Private Equity vs Investment Banking
 

Private equity and investment banking are different types of services provided by financial institutions, even though they are quite different to each other in their focus. Private equity firms are firms that collect funds from a number of private investors, pool those funds and make investments that they believe will yield attractive returns. Investment banks, on the other hand, provide a much larger set of services such as issue underwriting, brokerage services, trading activities, and conducting research on markets, industries, acquisitions, etc. The following article provides a clear overview of the two types of financial services and clearly explains their differences.

Private Equity

Private equity is the process in which funds are collected from a number of wealthy individuals or large institutional investors and are then invested in businesses that have promising futures, or businesses that are currently not making profits, but have good potential for growth given the right management and direction. Private equity firms typically buy firms that require better strategic direction, invest in these firms, and sell them off at a larger price once the company has been turned around into a successful profit making business.

Investors in private equities are wealthy individuals or institutional investors who are able and willing to hold up capital for long periods of time. Another issue with private equity investments is that these investments are quite risky as the private equity firms typically purchase firms that are in trouble. However, the motivation to invest is the sizable profit that can be obtained once the company is developed and sold/taken public.

Investment Banking

Investment banking usually takes the role of facilitator and helps firms that require funds to obtain them from the right sources/investors. Investment banks are very popular for the vital role that they provide in assisting firms list shares on a stock exchange, and raise funds from the public. In the IPO process, investment banks will conduct the road show, underwrite the share issue, assist in creating the prospectus, and will take responsibility to sell shares. In addition, investment bank also provide services in mergers and acquisitions by acting as the intermediary, provides research and analysis services by looking into various securities issues and deals, and also provides investment advice. The investment bank, often times, acts as the facilitator for such merger and acquisition deals.

Private Equity vs Investment Banking

Investment banks and private equity firms may be similar in the type of services they provide since they both operate in the financial services landscape, but the role that each play, their investor, and business focus are quite distinct to one another. Private equity firms invest by collecting funds from private or institutional investors and generating a return on these funds by making smart investments. Investment banks, on the other hand, offer a variety of services to clients that usually center around assisting companies list shares on a stock exchange or provide advice and assistance when undertaking large corporate deals. Investment banks are different to private equity firms, in that, private equities act as investment businesses, whereas investment banks act as advisors and facilitators.

Summary

• Investment banks and private equity firms may be similar in the type of services they provide since they both operate in the financial services landscape, but the role that each play, their investor, and business focus are quite distinct to one another.

• Private equity firms pool funds from private or institutional investors and invest in firms that require better strategic direction, and sell them off at a larger price once the company has been turned around into a successful profit making business.

• Investment banks, on the other hand, offer a variety of services to clients that usually center around assisting companies list shares on a stock exchange or provide advice and assistance when undertaking large corporate deals.