Investment Banking Industry

JP Morgan HQ, NYC

An investment bank is a financial intermediary that performs a variety of services, primarily:

1. 2. 3. 4.

Raising Capital & Security Underwriting Mergers & Acquisitions Sales & Trading Retail and Commercial Banking

Investment Banks earn profit by charging fees and commissions for providing these services and other kinds of financial and business advice.

Securities include stocks and bonds, and a stock offering may be an initial stock offering (IPO). Underwriting is the procedure by which an underwriter brings a new security issue to the investing public in an offering. The underwriter guarantees a certain price for a certain number of securities to the company (client) that is issuing the security (in exchange for a fee). Thus, the issuer is secure that they will raise a certain minimum from the issue, while the underwriter bears the risk of the issue.

Raising Capital and Security Underwriting

Investment banks are middlemen between a company that wants to issue new securities and the buying public. So when a company wants to issue, say, new bonds to get funds to retire an older bond or to pay for an acquisition or new project, the company hires an investment bank. The investment bank then determines the value and riskiness of the business in order to price, underwrite, and then sell the new bonds. Banks also underwrite other securities (like stocks) through an initial public offering (IPO) or any subsequent secondary (vs. initial) public offering.

When an investment bank underwrites stock or bond issues, it also ensures that the buying public primarily institutional investors, such as mutual funds or pension funds, commit to purchasing the issue of stocks or bonds before it actually hits the market. In this sense, investment banks are intermediaries between the issuers of securities and the investing public. In practice, several investment banks will buy the new issue of securities from the issuing company for a negotiated price and promotes the securities to investors in a process called a roadshow. The company walks away with this new supply of capital, while the investment banks form a syndicate (group of banks) and resell the issue to their customer base (mainly institutional investors) and the investing public.

Investment banks can facilitate this trading of securities by buying and selling the securities out of their own account and profiting from the spread between the bid and the ask price. This is called making a market in a security, and this role falls under Sales & Trading.

Sample Underwriting Scenario Gillette wants to raise some money for a new project. One option is to issue more stock (through whats called a secondary stock offering). Theyll go to an investment bank like JPMorgan, which will price the new shares (remember, investment banks are experts at calculating what a business is worth). JPMorgan will then underwrite the offering, meaning it guarantees that Gillette receives proceeds at $(share price * newly issued shares) less JPMorgans fees. Then, JPMorgan will use its institutional salesforce to go out and get Fidelity and many other institutional investors to buy chunks of shares from the offering. JPMorgans traders will facilitate the buying and selling of these new shares by buying and selling Gilette shares out of their own account, thereby making a market for the Gillette offering.

M&A advisory and other corporate reorganizations

Youve probably heard of the term Mergers and acquisitions or M&A. Its an important source of fee income for investment banks as the fee margin structure is substantially higher than most underwriting fees). This is why M&A bankers are some of the highest paid and highest profile bankers in the industry.

As a result of much corporate consolidation throughout the 1990s M&A advisory became an increasingly profitable line of business for investment banks. M&A is a cyclical business that was hurt badly during the financial crisis of 2008-2009, but rebounded in 2010, only to dip again in 2011. In any event, M&A will likely to continue being an important focus for investment banks. JP Morgan, Goldman Sachs, Morgan Stanley, Credit Suisse, BofA/Merrill Lynch, and Citigroup, are generally recognized leaders in M&A advisory and are usually ranked high inM&A deal volume . The scope of the M&A advisory services offered by investment banks usually relates to various aspects of the acquisition and sale of companies and assets such as business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation. Investment banks also provide fairness opinions documents attesting to the fairness of a transaction.

Sometimes firms interested in M&A advice will approach an investment bank directly with a transaction in mind, while many times investment banks will pitch ideas to potential clients.

WHAT IS M&A ADVISORY WORK, REALLY?

First, terminology: When an investment bank takes on the role of an advisor to a potential seller (target), this is called a sell-side engagement. Conversely, when an investment bank acts as an advisor to the buyer (acquirer), this is called a buy-side assignment. Other services include advising clients on joint ventures, hostile takeovers, buyouts, and takeover defense.

DUE DILLIGENCE

When investment banks advise a buyer (acquirer) on a potential acquisition, they also often help to perform whats called due diligence to minimize risk and exposure to an acquiring company, and focuses on a targets true financial picture. Due diligence basically involves gathering, analyzing and interpreting the targets financial information, analyzing historical and projected financial results, evaluating potential synergies and assessing operations to identify opportunities and areas of concern. Thorough due diligence enhances the probability of success by providing risk-based investigative analysis and other intelligence that helps a buyer identify risks and benefits throughout the transaction.

SAMPLE MERGER PROCESS

Week 1-4: Strategic Assessment of Possible Transaction The Investment Bank will identify potential merger partners and confidentially contact them to discuss the transaction. As potential partners respond, the Investment Bank will meet with potential partners to determine if transaction makes sense. Follow-up management meetings with serious potential partners to establish terms Weeks 5-6: Negotiation and Documentation Negotiate Definitive Merger and Reorganization Agreement Negotiate Pro Forma Composition of Board of Directors and Management Negotiate Employment Agreements, as required Ensure Transaction Meets Requirements for a Tax-Free Reorganization Prepare Legal Documentation Reflecting Results of Negotiations Week 7: Board of Directors Approval The Clients and Merger Partners Board of Directors Meet to approve the transaction, while the Investment Bank (and the investment bank advising the Merger Partner) both deliver a Fairness Opinion attesting to the fairness of the transaction (i.e., nobody overpaid or underpaid, the deal is fair). All definitive agreements are signed. Weeks 8-20: Shareholder Disclosure and Regulatory Filings Both companies prepare and file appropriate documents (Registration Statement: S-4), Schedule Shareholder Meeting. Prepare filings in accordance with antitrust laws (HSR) and begin preparing integration plans. Week 21: Shareholder Approval Both companies hold Shareholder Meeting to approve transaction Weeks 22-24: Closing Close merger and reorganization and Effect share issuance

Sales & Trading

Institutional investors such as pension funds, mutual funds, university endowments, as well as hedge funds use investment banks in order to trade securities. Investment banks match up buyers and sellers as well as buy and sell securities out of their own account to facilitate the trading of securities, thus making a market in the particular security which provides liquidity and prices for investors. In return for these services, investment banks charge commission fees.

In addition, the sales & trading arm at an investment bank facilitates the trading of securities underwritten by the bank into the secondary market. Revisiting our Gillette example, once the new securities are priced and underwritten, JP Morgan has to find buyers for the newly issued shares. Remember, JP Morgan has guaranteed to Gillette the price and quantity of the new shares issued, so JP Morgan better be confident that they can sell these shares.

The sales and trading function at an investment bank exists in part for that very purpose. This is an integral component of the underwriting process in order to be an effective underwriter, an investment bank must be able to efficiently distribute the securities. To this end, the investment banks institutional sales force is in place to build relationships with buyers in order to convince them to buy these securities (Sales) and to efficiently execute the trades (Trading).

Sales
A firms sales force is responsible for conveying information about particular securities to institutional investors. So, for example, when a stock is moving unexpectedly, or when a company makes an earnings announcement, the investment banks sales force communicates these developments to the portfolio managers (PM) covering that particular stock on the buy-side (the institutional investor). The sales force also are in constant communication with the firms traders and research analysts to provide timely, relevant market information and liquidity to the firms clients.

Trading
Traders are the final link in the chain, buying and selling securities on behalf of these institutional clients and for their own firm in anticipation of changing market conditions and upon any customer request. They oversee positions in various sectors (traders specialize, becoming experts in particular types of stocks, fixed income securities, derivatives, currencies, commodities, etc), and buy and sell securities to improve those positions. Traders trade with other traders at commercial banks, investment banks and large institutional investors.. Trading responsibilities include: position trading, risk management, sector analysis & capital management.

Equity Research
Traditionally, investment banks have attracted equity trading business from institutional investors by providing them with access to equity research analysts and t he potential of being first in line for hot IPO shares that the investment bank underwrote. As such, research has traditionally been an essential supporting function to equity sales and trading (and represents a significant cost of the sales & trading business).

Retail Brokerage and Commercial Banking

From 1932 until 1999 there was a law called The Glass-Steagall Act, which said that commercial banks can lend money, extend lines of credit, and open checking and savings accounts, while investment banks can underwrite securities, advise on M&A, and provide institutional brokerage services. Under the Glass Stegall Act, commercial banks and investment banks had to limit their respective activities to that which traditionally fell under those respective labels.

Late 1999 saw the repeal of the Depression-era Glass-Steagall Act, marking the deregulation of the financial services industry. This now allowed commercial banks, investment banks, insurers, and securities brokerages to offer one anothers services.

As such, many investment banks now offer retail brokerage (retail meaning the customers are individual investors rather than institutional investors) as well as commercial lending. For example, today you can open a checking account with JP Morgan via its Chase brand, while JP Morgan offers investment banking services and asset management. Until 1999, one financial institution providing all of these services under one roof was technically not allowed (although many post-enactment loopholes basically neutered the law long before 1999).

It is not an understatement to say that deregulation has transformed the financial services industry, with the repeal paving the way for mega-mergers and consolidation in the financial services industry.

In fact, many blame the repeal of the Glass-Steagall as a contributing factor to the financial crisis in 2008-9.

The History of Investment Banking

Undoubtedly, investment banking as an industry in the United States has come a long way since its beginnings. Below is a brief review of the history

1896-1929
Prior to the great depression, investment banking was in its golden era, with the industry in a prolonged bull market. JP Morgan and National City Bank were the market leaders, often stepping in to influence and sustain the financial system. JP Morgan (the man) is personally credited with saving the country from a calamitous panic in 1907. Excess market speculation, especially by banks using Federal Reserve loans to bolster the markets, resulted in the market crash of 1929, sparking the great depression.

1929-1970
During the Great Depression, the nations banking system was in shambles, with 40% of banks eith er failing or forced to merge. The Glass-Steagall Act (or more specifically, the Bank Act of 1933) was enacted by the government with the intent of rehabilitating the banking industry by erecting a wall between commercial banking and investment banking. Additionally, the government sought to provide the separation between investment bankers and brokerage services in order to avoid the conflict of interest between the desire to win investment banking business and duty to provide fair and objective brokerage services (i.e., to prevent the temptation by an investment bank to knowingly peddle a client companys overvalued securities to the investing public in order to ensure that the client company uses the investment bank for its future underwriting and advisory needs). The regulations against such behavior became known as the Chinese Wall.

1970-1980
In light of the repeal of negotiated rates in 1975, trading commissions collapsed and trading profitability declined. Research-focused boutiques were squeezed out and the trend of an integrated investment bank, providing sales, trading, research, and investment banking under one roof began to take root. In the late 70s and early 80s saw the rise of a number of financial products such as derivatives, high yield an structured

products, which provided lucrative returns for investment banks. Also in the late 1970s, the facilitation of corporate mergers was being hailed as the last gold mine by investment bankers who assumed that GlassSteagall would some day collapse and lead to a securities business overrun by commercial banks. Eventually, Glass-Steagall did crumble, but not until 1999. And the results werent nearly as disastrous as once speculate d.

1980-2007
In the 1980s, investment bankers had shed their stodgy image. In its place was a reputation for power and flair, which was enhanced by a torrent of mega-deals during wildly prosperous times. The exploits of investment bankers lived large even in the popular media, where author Tom Wolfe in Bonfire of the Vanities and movie maker Oliver Stone in Wall Street focused on investment banking for their social commentary.

Finally, as the 1990s wound down, an IPO boom dominated the perception of investment bankers. In 1999, an eye-popping 548 IPO deals were done among the most ever in a single year with most going public in the internet sector.

The enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 effectively repealed the longstanding prohibitions on the mixing of banking with securities or insurance businesses under the Glass-Steagall Act and thus permitted broad banking. Since the barriers that separated banking from other financial activities had been crumbling for some time, GLBA is better viewed as ratifying, rather than revolutionizing, the practice of banking.

Investment Banking After the 2008 Financial Crisis

The greatest global financial crisis since the Great Depression was triggered in 2008 by multiple factors including the collapse of the subprime mortgage market, poor underwriting practices, overly complex financial instruments, as well as deregulation, poor regulation, and in some cases a complete lack of regulation. Perhaps the most substantial piece of legislation that emerged from the crisis is the Dodd-Frank Act, a bill that sought to improve the regulatory blind spots that contributed to the crisis, by increasing capital requirements as well as bringing hedge funds, private equity firms, and other investment firms considered to be part of a minimally regulated shadow banking system. Such entities raise capital and invest much like banks but escaped regulation which enabled them to overleverage and exacerbated system-wide contagion. The jury is still out on Dodd-Franks efficacy, and the Act has been heavily criticized by both those who argue for more regulation and those who believe it will stifle growth.

INVESTMENT BANKS LIKE GOLDMAN CONVERTED TO BHCS

Pure investment banks like Goldman Sachs and Morgan Stanley traditionally benefited from less government regulation and no capital requirement than their full service peers like UBS, Credit Suisse, and Citi.

During the financial crisis, however, the pure investment banks had to transform themselves to bank holding companies (BHC) to get government bailout money. The flip-side is that the BHC status now subjects them to the additional oversight.

INDUSTRY PROSPECTS AFTER THE CRISIS

Investment banking advisory fees in 2010 were $84 billion globally, the highest level since 2007. Although the official scorecard isnt in, based on press releases from the largest financial institutions, 2011 will see a significant decline in fees. The future of the industry is a highly debated topic. There is no question that the financial services industry is going through something pretty significant post-crisis. Many banks had near-death experiences in 2008 and 2009, and remain hobbled. 2011 saw much lower profitability for many of the largest financial institutions. This directly impacts bonuses for even the entry level investment banker, with some pointing to smaller fractions of ivy league graduating classes going into finance as a harbinger of a fundamental shift . That being said, those trying to break into the industry will find that compensation is still high compared to other career opportunities. Also, the job function of an M&A professional has not dramatically changed, so the professional development opportunities havent changed.

Investment Bank Organizational Structure

Investment banks are split up into front office, middle office, and back office. Each sector is very different yet plays an important role in making sure that the bank makes money, manages risk, and runs smoothly.

FRONT OFFICE
Think you want to be an investment banker? Chances are the role you are imagining is a front office role. The front office generates the banks revenue and consists of three primary divisions: investment banking, sales & trading, and research. Investment banking is where the bank helps clients raise money in capital markets and also where the bank advises companies on mergers & acquisitions. At a high level, sales and trading is where the bank (on behalf of the bank and its clients) buys and sells products. Traded products include anything from commodities to specialized derivatives. Research is where banks review companies and write reports about future earnings prospects. Other financial professionals buy these reports from these banks and use the reports for their own investment analysis.

Other potential front office divisions that an investment bank may have include: commercial banking, merchant banking, investment management, and global transaction banking.

MIDDLE OFFICE
Typically includes risk management, financial control, corporate treasury, corporate strategy, and compliance. Ultimately, the goal of the middle office is to ensure that the investment bank doesnt engage in certain activities that could be detrimental to the banks overall health as a firm. In capital raising, especially, there is significant

interaction between the front office and middle office to ensure that the company is not taking on too much risk in underwriting certain securities.

BACK OFFICE
Typically includes operations and technology. The back office provides the support so that the front office can do the jobs needed to make money for the investment bank.

Investment Banking FAQ Industry Overview

What is an investment bank?

An investment bank is a financial institution that assists wealthy individuals, corporations, and governments in raising capital by underwriting and/or acting as the clients agent in the issuance of securities. An investment bank may also assist companies with mergers and acquisitions and may provide support services in market making and trading of various securities. The primary services of an investment bank include: corporate finance, M&A, equity research, sales & trading, and asset management. Investment banks earn profit by charging fees and commissions for providing these services and other kinds of financial and business advice.

How do investment banks help companies in M&A transactions?

Investment banks play an important role from the moment companies contemplate an acquisition to the final steps. When a buyer or seller contemplates an acquisition, the respective board of directors may choose to form a special committee to evaluate the merger proposal, and typically retains an investment bank to advise and evaluate the transactions terms and price as well as help the acquiring company arrange financing for the deal.

To provide meaningful advisory, investment banks create different valuation models to determine valuation ranges for a company. They may also conduct accretion/dilution analysis to assess affordability to the acquirer and the effect of the consideration paid on projected earnings per share. Banks also help clients assess synergistic opportunities from acquiring other companies and how those synergies can create value and reduce costs in the future. A buy side M&A advisor represents the acquirer and determines how much the client should pay to buy the target. A sell side M&A advisor represents the seller and determines how much the client should receive from the sale of the target.

How do investment banks help companies raise capital?

Investment banks primarily help clients raise money through debt and equity offerings. This includes raising funds through Initial Public Offerings (IPOs), credit facilities with the bank, selling shares to investors through private placements, or issuing and selling bonds on behalf of the client.

The investment bank serves as an intermediary between investors and the company and earns revenue through advisory fees. Clients want to utilize investment banks for their capital raising needs because of the investment banks access to investors, expertise in valuation, and experience in bring companies to market.

Often, investment banks will buy shares directly from the company and will try to sell at a higher price a process known as underwriting. Underwriting is riskier than simply advising clients since the bank assumes the risk of selling the stock for a lower price than expected. Underwriting an offering requires the division to work with Sales & Trading to sell shares to the public markets.

What are the top investment banks?

There is not one correct answer. The answer depends on what grounds you want to rank the banks. If you are referring to top investment banks as measured by deal volume or capital raised then you need to access league tables, and even league tables are notoriously sliced and diced by investment banks to make themselves look bigger. Here are league tables for M&A deal volume in the first three quarters of 2011. Thomson Reuters is the authoritative provider of league tables. Here is a complete list of investment banks. When it comes to prestige or selectivity, the Vault Guide produces helpful rankings to help you figure out which banks are more prestigious and selective. Be careful not to get too caught up in any rankings because they often change.

What is a bulge bracket bank and what are the different bulge bracket banks?
Bulge bracket investment banks are the worlds largest and most profitable multi-national full-service investment banks. These banks cover most or all industries and most or all the various types of investment banking services. There is not really an official list of bulge bracket banks, but the banks below are considered bulge bracket by Thomson Reuters.

J.P. Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, and UBS.

What is a boutique bank?

Any investment bank not considered bulge bracket is considered boutique. Boutiques vary in size from a few professionals to thousands and can generally be categorized into three different types: 1. 2. Those that specialize in one or more products like M&A and restructuring. Well-known M&A boutiques include: Lazard, Greenhill, Evercore, and Gleacher Those that specialize in one or more industries like Healthcare, Telecom, Media, etc. Well-known industry-focused boutiques include: Cowen & Co. (Healthcare), Allen & Co. (Media), and Berkery Noyes (Education) 3. Those that specialize in small or mid-sized deals and small or mid-sized clients (a.k.a. The Middle Market). Prominent middle market investment banks include: Houlihan Lokey, Jefferies & Co., William Blair, Piper Jaffray, and Robert W. Baird

What are the different types of groups within an investment bank?

Within an investment banking division, bankers are typically bucketed into two groups:product and industry. The three most common product groups are mergers and acquisitions (M&A), restructuring, and leveraged

finance. There are also product groups within securities underwriting. Such groups include: equity, syndicated finance, structured finance, private placements, high yield bonds, etc. Bankers in product groups have product knowledge and tend to execute transactions related to their product in a variety of different industries. Their specialty is on the product execution not the industry. Bankers in industry groups cover specific industries and tend to do more marketing activity (pitching). Industry bankers tend also to have more of the relationships with companies senior management than do product bankers (although this is not always true).

Common industry groups include Consumer & Retail, Energy and Utilities, Financial Institutions Group (FIG), Healthcare, Industrials, Natural Resources, Real Estate / Gaming / Lodging, Technology / Media / Telecom (TMT). Many times these groups can be broken down into sub groups. For example, Industrials may be broken down into Automotive, Metals, Chemicals, Paper & Packaging, etc. Financial Sponsors (FSG) is a unique industry group in that bankers in FSG cover private equity firms.

Investment Banking vs. Private Equity

I do PRIVATE EQUITY, not investment banking. why can't you get that, godammit!

Private equity tends to be a common exit path for investment banking analysts and consultants. As a result, we get a lot of questions on both the functional and the actual day-to-day differences between investment banking analyst/associate and private equity associate roles, so we figured we would lay it out here. Well compare the industry, roles, culture/lifestyle, compensation, and skills to accurately compare and contrast both careers in detail.

Big picture differences The business model Put plainly, investment banking is an advisory/capital raising service, while private equity is an investment business. An investment bank advises clients on transactions like mergers and acquisitions, restructuring, as well as facilitating capital-raising. Read an on overview of the investment banking industry. Private equity firms, on the other hand, are groups of investors that use collected pools of capital from wealthy individuals, pension funds, insurance companies, endowments, etc. to invest in businesses. Private equity funds make money from a) convincing capital holders to give them large pools of money and charging a % on these pools and b) generating returns on their investments. They are investors, not advisors. Read how a basic LBO works.

The two business models do intersect. Investment banks (often through a dedicated group within the bank focused on financial sponsors) will pitch buyout ideas with the aim of convincing a PE shop to pursue a deal. Additionally, a full-service investment bank will seek to provide financing for PE deals.

The grunt work: Investment banking Analysts/Associates vs. Private Equity Associates The entry level investment banking analyst/associate has three primary tasks: pitchbook creation, modeling, and administrative work. Read about an investment banking analysts day in the life. There is less standardization in private equity various funds will engage their associates in different ways, but there are several functions that are fairly common, and private equity associates will participate in all these functions to some extent. They can be boiled down into four different areas:

Fundraising Screening for and making investments Managing investments and portfolio companies Exit strategy

Fundraising Typically handled by the most senior private equity professionals, but Associates may be asked to help out with this process by putting together presentations that illustrate the funds past performance, strategy, and past investors. Other analysis may include credit analysis on the fund itself. Screening for and making investments Associates often play a large role in screening for investment opportunities. The Associate puts together various financial models and identifies key investment rationale for senior management regarding why the fund should invest capital in such investments. Analysis may also include how the investment may complement other portfolio companies that the PE fund owns. Banking Models vs Private Equity Models Because Associates are often ex-investment bankers, much of the modeling and valuation analysis required in a PE shop is familiar to them. That said, the level of detail of investment banking pitchbooks vs PE analysis varies widely. Ex-bankers often find that the huge investment banking models they are used to working on are replaced by more targeted, back of the envelope analysis in the screening process, but the diligence process is a lot more thorough. One cynical argument to explain this difference is that while investment bankers build models to impress clients to win advisory business, PE firms build models to confirm an investment thesis where theyve got some serious skin in the game. As a result, all te bells and whistles are taken out of the models, with a much bigger focus is on the operations of the businesses being acquired. When deals are under way, associates will also work with lenders and the investment bank advising them to negotiate financing. Managing investments and portfolio companies Often managed by a dedicated operations team. Associates (especially those with management consulting experience) may assist the team in helping portfolio companies revamp operations and increase operating efficiency (EBITDA margins, ROE, cost cutting). How much interaction an Associate gets with this process purely depends on the fund and the funds strategy. There are also some funds that have Associates dedicated to just this part of the deal process.

Exit strategy Involves both the junior team (including Associates) and senior management. Specifically, associates screen for potential buyers, build analyses to compare exit strategies Again, this process is modeling heavy and requires indepth analysis.

Investment Banking vs. Private Equity Culture / Lifestyle: Lifestyle is one of the areas where PE is just clearly better. Investment banking is not for those looking for great work-life balance. Getting out at 8-9pm is considered a blessing. Also, investment banking is not an environment with hand-holding as you must be able to run with projects even when little direction is provided. That said, there is some upside other than money and career prospects. You will definitely develop close friendships with your peers because you are all in the trenches together. Many Analysts and Associates will tell you that some of their closest friends after college/business school are their investment banking peers that they grew close with while working such long hours.

In private equity, youll work hard, but the hours are not nearly as bad. Generally the lifestyle is comparable to banking when there is an active deal, but otherwise much more relaxed. You usually get into the office around 9am and may leave between 7pm-9pm depending on what youre working on. You may work some weekends (or part of a weekend) depending on if you are on an active deal, but on average, weekends are your own personal time. There are certain PE shops that have taken a Google approach and offer free food, toys in the office, televisions in offices, and sometimes even beer in the fridge or a keg in the office. Other PE firms are run more like traditional, conservative corporations where you are in a cube environment.

PE firms tend to be smaller in nature (there are exceptions), so your entire fund may be only 15 people. As an Associate, you will have interaction with everyone including the most senior partners. Unlike at many of the bulge bracket investment banks, senior management will know your name and what you are working on.

In addition, private equity is a bit closer to sales & trading in the sense that there is a culture of performance. In banking, analysts and associates have virtually no impact on whether a deal closes or not, while PE associates are a little closer to the action. Many PE associates feel like they are directly contributing to the funds performance. That feeling is almost completely absent from banking. PE associates know that a large part of their compensation is a function of how well these investments do and have a vested interest in focusing on how to extract the maximum value of all portfolio companies.

2011 Investment banking compensation range (base and bonus) Analyst First Year: $130-$140k Analyst Second Year: $155-$165k Analyst Third Year +: $175-195k Associate First Year: $150K $ 185K (2012 numbers reflect far lower numbers across the board)

2011 Private equity compensation range (base and bonus):

Associate First Year: $100K $ 220K Associate Second Year: $120K $ 250K Associate Third Year +: $150 K $ 300K

A word on compensation An investment banker typically has two salary parts: salary and bonus. The majority of money that a banker makes comes from the bonus and the bonus increases drastically as you move up the hierarchy. The bonus component is a function both individual performance and group/firm performance. Click here for investment banking salary data. Compensation in the private equity world is not as well defined as in the investment banking world. PE Associates compensation typically includes base and bonus like investmen t bankers compensation. The base pay is usually on par with investment banking. Like banking, the bonus is a function of individual performance and fund performance, usually with a higher weighting on fund performance. Very few PE associates receive carry (a portion of the actual return the fund generates on investments and the largest portion of the partners compensation).

Bottom line Inevitably, someone will ask for a bottom line which industry is better? Unfortunately, Its not possible to say in absolute terms whether investment banking or private equity is the better profession. It depends on the type of work that you ultimately want to do and the lifestyle/culture and compensation that you desire. However, for those lacking a clear vision of what to do in the long-term, investment banking puts you at the center of the capital markets and provides exposure to broader types of financial transactions (theres a caveat the breadth of exposure actually depends on your group). Exit opportunities for investment bankers range from private equity, to industry, to more banking, to business school, to start-ups. If you know that you want to work on the buy side, however, there are very few opportunities more enticing than private equity.