Most finance and business graduates dream of joining top league investment banks or elite specialized boutique banks at the beginning of their career and thereafter exit to a top-tier private equity firm after two years of investment banking experience to make millions.
The typical career path imagined and undertaken by most professionals specializing in finance and business goes like this – complete graduation and get qualified to lead an investment banking career. Preferably, get into Goldman Sachs, Morgan Stanley, or other bulge bracket investment banks. From there, shift to a top private equity firm. Enroll in MBA, or earn an asset management qualification in private equity to embark on PE career. Complete MBA alongside PE to climb the career ladder.
Despite such a well-charted plan, once in their second year of investment banking, most professionals start to question their career strategy.
1. Is it profitable to make a shift from an investment bank to a private equity firm?
2. How much better is private equity than investment banking?
3. Or, should I just continue with investment banking and rise up to the ranks of the Managing Director (MD) than join a private equity firm?
If you are confused about making a shift from IB to PE and want to compare the compensation received in investment banking versus private equity career, read on.
Before we get to the pay comparison between private equity and investment banking, a look at the quick overview of both industries.
Investment Banking & Private Equity: Overview
Investment Banking
Investment banks help clients by providing financial advisory services and assist companies in mergers and acquisitions, restructuring, and facilitating raising capital. They are financial brokers, experts at determining the worth of a business, who help clients raise funds through IPO, identifying merger targets, or by other activities. Among the investment, banking titans include the largest and most profitable global investment banks, like Goldman Sachs, JPMorgan Chase, Barclays, Morgan Stanley, and others. There are also specialized boutique investment banks.
Career projection in IB typically advance like:
- Analyst
- Associate
- Senior Associate
- Vice President
- Director or Partner
Private Equity
Private Equity firms garner funds from high-net-worth individuals and big institutional investors, and then reinvest them in stressed companies through leveraged buyouts, and sometimes taking partial stake purchases. Among the private equity titans that have risen to the top include The Blackstone Group, Apollo, KKR, The Carlyle Group, Silver Lake, TPG Capital, General Atlantic, and others. There are some elite highly specialized boutique firms that fund deals with small sums.
A Career in Private Equity Jobs typically progresses like:
- Associate
- Senior Associate
- Vice President
- Managing Director
Compensation Comparison
Top-Tier Investment Banks vs. Private Equity Firms
The reason for such popularity of the coveted career path mentioned above is that eventually private equity is said to pay well.
As a rule, the logic says that top private equity firms pay much better than top-tier investment banks. So, Blackstone would usually pay a little bit higher than a bulge bracket investment bank (top-tier banks).
However, that's true and can be guaranteed only when you join the megafund private equity firm. However, over 99% of private equity professionals who don't work at megafunds may experience a different reality. Before we get to the aspects where investment banking may trump a career in private equity in terms of pay, here's what is changing at even the top investment banks.
Bulge bracket investment banks are trying to retain their best talents and change their image from being financial advisors to the provision of a full suite of capital market solutions. This opens the door for compensation and bonuses at IB reaching par with private equity.
Elite Boutique Investment Banks vs. Top Private Equity Firms
The peculiarity with elite boutique investment banks is that they are very comfortable at giving raise as they try to get the best and retain their brightest.
So, does the Apollo (one of the top PE firms) pay better? Certainly. But, when compared to an elite boutique (say, Moelis & Co.) the compensation package of an Associate at Moelis may very well be higher than one at Apollo.
Low Pay but Very-High Carry: Middle-Market Private Equity Firms
The base salary at most middle-market private equity firms is lower at mid-market firms. However, bonuses at private equity firms are a little bit high than investment banks, and furthermore, the biggest equalizer for private equity jobs is the carried interest.
Carry is the gamechanger in private equity compensation.
Carried interest is the percentage of profits that are shared with private equity professionals (aka General Partners) involved in managing the business and fund. At least, in theory, this is the component that makes private equity jobs highly lucrative.
Take this example: Say, an associate at a second-tier PE fund gets the base salary of $150,000, $75,000 bonus, and $75,000 carried interest. This payout is great and on par, if not higher than in investment banking.
Now, where the problem arises is that the carried interest is also uncertain. If the fund you are working with performs badly, then you will not get any carry (as it's a part of the profits accrued by the business), and on top of it, you may also lose the job.
This is the reason why most aim for getting a job in a top-tier private equity firm, as they are considered as proven firms who will get money as well as much-higher certainty of steady career progression and payout.
When it comes to much smaller private equity firms, professionals may feel stuck as carried interest can take a while to realize, and one may not be able to leave without risking a huge chunk of her money being forfeited.
When You Are the Boss!
What happens to compensation for private equity professionals who are fortunate enough to reach the highest echelons of the fund. What does private equity offer to MD level professionals? Does the MD at PE make more than at investment banks?
If you reach the top, being a professional at the Private Equity fund certainly pays well, and you would earn materially a lot more than as a partner or MD at an investment bank.
Who Wins?
Top private equity firms tend to pay either inline or a bit more than bulge bracket investment banks. However, the real compensation difference between private equity and investment banking comes from the carried interest.
The function of who pays the most eventually comes down to the scale of the firm or bank, and the risks associated with ownership in PE.
Private equity jobs and especially being at the top at them is entrepreneurial. You bet on business and lead the team and book of the business. Now, if the franchise you support does well, you can earn good benefits, else, not. One good project can mean investors are lined up to give you money, and a bad year can stump you significantly.
Investment banking, irrespective of a good or bad year, largely remains the same as the client base remains the same. Since the risks are less, so are the snowball rewards that come with carrying in PE.
So, as with most things in finance, the answer to who pays well is, it depends. On a variety of variables.
investors talking -DepositPhotos
