Both private equity and investment banking aim toward the same goal, but from opposite directions. Private equity firms collect high-net-worth funds and look for investments in other businesses. Investment banks find businesses and then go into the capital markets looking for ways to raise money from the investment crowd.
Sell-Side Versus Buy-Side
Investment bankers work on the sell-side, meaning they sell business interest to investors. Their primary clients are corporations or private companies. When a company wants to go public or is working through a merger-and-acquisition deal, it might solicit the help of an investment bank.
Conversely, private equity associates work on the buy-side. They purchase business interests on behalf of investors who have already put up the money. On some occasions, private equity firms buy controlling interests in other businesses and are directly involved in management decisions.
In 1933, the United States became the first and only country in the world to forcibly separate investment banking and commercial banking. For the next 66 years, investment banking activities were completely divorced from commercial banking activities, such as taking deposits and making loans. These barriers were removed with the Gramm-Leach-Bliley Act of 1999. Investment banks are still heavily regulated, most notably with proprietary trading restrictions from the Dodd-Frank Act of 2010.
Private equity, like hedge fund investing, has historically escaped most of the regulations that impact banks and publicly traded corporations. The logic behind a light regulatory hand is that most private equity investors are sophisticated and wealthy and can take care of themselves. However, Dodd-Frank gave the SEC a green light to increase its control over private equity. In 2012, the very first private equity regulatory agency was created. Particular attention has been paid to advising fees and taxation of private equity activity.
Investment banking analysis is much more careful, abstract and vague than private equity analysis. Part of this is explained by the compliance risks investment banks face, as painting too specific or too rosy a picture can be perceived as misleading.
Another possible explanation is that private equity associates are much more likely to have "skin in the game," so to speak. With their own capital on the line, and less patient clientele, private equity analysts often dig deeper and more critically.
Colloquial tales of a private equity associate lifestyle appear to be much more forgiving and balanced than their counterparts in investment banking. The strict, suit-and-tie, 14-hour and high-stress corporate culture popularized in movies and television reflects investment banking culture.
Private equity firms are usually smaller and more selective about their employees. But once a hire is made, they care less about how performance is maintained. There are exceptions and overlaps in every industry but, in general, the average day is a bit less stressful for private equity associates.