Investment banking vs private equity: what is the difference?

Investment banking and private equity sit on opposite sides of the same deals. A bank advises a company on selling itself or raising money, and is paid a fee whether or not the buyer does well afterwards. A private equity firm is the buyer: it uses a fund of other people’s money, plus borrowed money, to purchase companies, tries to improve them, and sells them years later, keeping a share of the gain. One is an agent; the other is a principal.

What each one does

Investment banking’s core services are underwriting, raising capital by selling securities, and advisory, helping companies with mergers, acquisitions and restructurings[1Source 1Giuliano Iannotta, Investment Banking: A Guide to Underwriting and Advisory Services (Springer, 2010), §1.1, “Introduction”, and §1.2, “Definitions”.]. The bank does not own what it sells or advises on. Private equity, by contrast, belongs to a different part of the financial world: the same textbook files it under alternative asset management, the managing of other people’s money in vehicles that buy whole companies, and explicitly not under core investment banking[1Source 1Giuliano Iannotta, Investment Banking: A Guide to Underwriting and Advisory Services (Springer, 2010), §1.1, “Introduction”, and §1.2, “Definitions”.]. The two meet constantly: private equity funds are increasingly important clients of the banks for both advisory and underwriting work, and, the 2010 textbook says, virtually all major banks then managed private equity funds of their own, the two reasons it gives for the increasing movement of people from banking into private equity[1Source 1Giuliano Iannotta, Investment Banking: A Guide to Underwriting and Advisory Services (Springer, 2010), §1.1, “Introduction”, and §1.2, “Definitions”.].

How a private equity firm is built

A private equity firm raises a fund, legally a limited partnership: the firm is the general partner that manages it, and the limited partners, pension funds, endowments, insurers and wealthy individuals, provide most of the capital[2Source 2Steven N. Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equity”, Journal of Economic Perspectives 23, no. 1 (2009), “Private Equity Funds”, pp. 123–124.]. The fund has a fixed life, usually ten years, extendable by up to three; the firm normally has up to five years to invest the money and the rest of the life to return it[2Source 2Steven N. Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equity”, Journal of Economic Perspectives 23, no. 1 (2009), “Private Equity Funds”, pp. 123–124.]. The firms themselves are small: one textbook puts the average at about ten professionals[3Source 3Giuliano Iannotta, Investment Banking: A Guide to Underwriting and Advisory Services (Springer, 2010), §2.3, “The Agreement”.], and another says the largest may have twenty to forty general partners[4Source 4David P. Stowell, Investment Banks, Hedge Funds, and Private Equity, 3rd ed. (Academic Press, 2017), ch. 16, “Structure of a Private Equity Fund”, p. 344.]. A large investment bank, by contrast, employs thousands in its sales and trading division alone[5Source 5David P. Stowell, Investment Banks, Hedge Funds, and Private Equity, 3rd ed. (Academic Press, 2017), ch. 5, “Sales and Trading”, p. 118.].

The firm is paid in three ways: an annual management fee, usually a percentage of committed capital and later of invested capital; a share of the fund’s profits, called carried interest, that almost always equals twenty percent; and, at some firms, deal and monitoring fees charged to the companies it owns[2Source 2Steven N. Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equity”, Journal of Economic Perspectives 23, no. 1 (2009), “Private Equity Funds”, pp. 123–124.]. The management fee has been around two percent of assets under management, and the carry is paid only when an investment is sold, often after a holding period of three to seven years[4Source 4David P. Stowell, Investment Banks, Hedge Funds, and Private Equity, 3rd ed. (Academic Press, 2017), ch. 16, “Structure of a Private Equity Fund”, p. 344.]. The paper’s worked example gives the scale: on a fund of two billion dollars, a two percent fee is forty million a year during the investment period, and if the fund turned two billion into six, the carried interest would be eight hundred million[2Source 2Steven N. Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equity”, Journal of Economic Perspectives 23, no. 1 (2009), “Private Equity Funds”, pp. 123–124.].

How the pay differs

Bankers are paid a salary and a bonus out of the fees the firm earns on deals, and the great majority of advisory fees are success fees, earned when the deal closes, whatever happens afterwards[6Source 6Michael E. S. Frankel and Larry H. Forman, Mergers and Acquisitions Basics: The Key Steps of Acquisitions, Divestitures, and Investments, 2nd ed. (Wiley, 2017), “Investment Bankers”, pp. 39–40.]. Private equity professionals share, through the firm, in fees that arrive regardless of performance and in carried interest that arrives only if the fund makes money and only years later. A guide to private equity reports the argument that, as funds have grown, the fee income alone can produce substantial profits for a firm’s partners whether or not the fund itself succeeds, a challenge to the industry’s claim that its interests are aligned with its backers’[7Source 7John Gilligan and Mike Wright, Private Equity Demystified: An Explanatory Guide, 4th ed. (Oxford University Press, 2020), “Fee Income”, pp. 52–53.]. Actual pay at either kind of firm varies too much by firm, seniority and year to state here.

The usual path

Private equity firms recruit from the banks’ analyst classes, and it is a common route: two years as an investment banking analystWhat does an investment banking analyst do?An investment banking analyst builds the models and presentation pages behind every deal, works long weeks, and usually moves on after two or three years.Jobs and ranks · revised 28 September 2026 · 835 words · 5 sources · 4 min, then a move. The textbook on the analyst programme lists private equity first among the employers departing analysts go to, after graduate school[8Source 8K. Thomas Liaw, The Business of Investment Banking: A Comprehensive Overview, 3rd ed. (Wiley, 2011), “Investment Banking Financial Analysts”, pp. 52–53.], and records that so many analysts left after one or two years for private equity and other employers that banks reworked the programme to keep them[9Source 9David P. Stowell, Investment Banks, Hedge Funds, and Private Equity, 3rd ed. (Academic Press, 2017), ch. 10, “Analysts”, pp. 223–224.]. The skills carry over because the work does: the leveraged buyoutLeveraged buyoutA leveraged buyout buys a company mostly with borrowed money that the company then repays. How the debt, the sponsor’s equity and the exit fit together.Terms and methods · revised 28 September 2026 · 1,242 words · 4 sources · 6 min model that a banker builds to pitch a sale is the model a private equity associate builds to decide whether to buy.

Frequently asked questions

Is private equity a type of investment banking?

No. Private equity is a form of alternative asset management, managing other people’s money by buying companies; investment banking is advising and underwriting for a fee. Private equity funds are important clients of banks, and banks have run funds of their own[1Source 1Giuliano Iannotta, Investment Banking: A Guide to Underwriting and Advisory Services (Springer, 2010), §1.1, “Introduction”, and §1.2, “Definitions”.].

Which pays more, investment banking or private equity?

It depends on the firm, the seniority and the year, and no reliable general figure exists. The structures differ: bankers are paid from deal fees earned at closing, while private equity professionals share in management fees and in carried interest that is paid only when investments are sold[6Source 6Michael E. S. Frankel and Larry H. Forman, Mergers and Acquisitions Basics: The Key Steps of Acquisitions, Divestitures, and Investments, 2nd ed. (Wiley, 2017), “Investment Bankers”, pp. 39–40.][2Source 2Steven N. Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equity”, Journal of Economic Perspectives 23, no. 1 (2009), “Private Equity Funds”, pp. 123–124.][4Source 4David P. Stowell, Investment Banks, Hedge Funds, and Private Equity, 3rd ed. (Academic Press, 2017), ch. 16, “Structure of a Private Equity Fund”, p. 344.].

Do you need to do investment banking before private equity?

Not strictly, but it is the common route: private equity firms recruit from the banks’ analyst programmes, and the textbooks list private equity among the main destinations of departing analysts[8Source 8K. Thomas Liaw, The Business of Investment Banking: A Comprehensive Overview, 3rd ed. (Wiley, 2011), “Investment Banking Financial Analysts”, pp. 52–53.][9Source 9David P. Stowell, Investment Banks, Hedge Funds, and Private Equity, 3rd ed. (Academic Press, 2017), ch. 10, “Analysts”, pp. 223–224.].

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