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Private equity vs. Investment banking

While private equity firms and investment banks are both involved with the shares of companies, they still have their differences in terms of which side they work on. Investment bankers will work by marketing shares to other investors. On the other hand, private equity firms will invest their own money in private companies. It depends on what your preference is in terms of how you’d like to invest. This article will explore what is the difference between private equity vs investment banking, giving you the ability to make an educated choice.

What is private equity and what are its benefits?

Private equity involves investing in a private company, which is not listed on a public exchange. This is where investors can directly invest in companies or acquisitions of public companies, which would then result in the delisting of public equity.

This is an alternative to the regular financing options. An individual looking to make an investment can go directly to a company and contribute funds. There are firms that can handle private equities and charge management and performance fees from investors in a fund.

Investments in this form come from either institutional or accredited investors that are planning to invest for longer periods of time. Private equity firms are general partners, whereas the funds are limited liability partnerships. The GP owns 1 percent of the shares but has full liability. They are also in charge of overseeing investment in the implementation and operational forms. The remaining 99% is owned by the limited liability partnerships—the investors.  

Private equity is an advantage for startups. They are able to access funds from the investors and avoid the usual options of taking out a bank loan with high interest rates or listing on public markets for funding. Venture capital, a type of private equity, can finance new ideas or companies at the early stage of their business.

There are different types of private equity funding:

  • Distressed funding
  • Leveraged Buyouts
  • Real Estate Private Equity
  • Funds of Funds
  • Venture Capital

Have a look at Finnovating’s challenges which allow investors to launch investment projects and startups to apply for them.

The disadvantages of private equity can include the ability to quickly liquidate holdings and the pricing of the shares being negotiated, rather than the ups and downs of markets.

Understanding the different types of funding can help you evaluate the best option moving forward. If you want to fund ideas and startups, you’ll see that venture capital may be the best way to get involved.

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What is investment banking?

Investment banks will seek out business and then look at capital markets to evaluate how to raise money from investors. Investment bankers aim to market shares of IPO companies to other investors. Investment banks focus on the sell-side and their clients are either corporations or private companies.  

Investment banks assist in larger financial transactions and can also provide advice on a company’s worth. They can also help evaluate the structure of a deal if a client is considering a sale, merger or acquisition of a company.  

The services of investment bankers can include underwriting new debt, equity securities for a wide variety of corporations, and assisting in the process of business mergers, as well as acquisitions and trades for both institutions and private investors. Investment bankers can also help raise the funds and assist with the paperwork to help a company reach its initial public offering and go public.

Investment bankers can help their clients see if there are any risks to be found in projects before a company moves forward. They are also used as consultants by both businesses and nonprofits for advice on moving forward with their plans.

There are several types of investment banking:

  • Mergers and acquisitions
  • Corporate Financing
  • Equity Research
  • Sales and Trading of Stock
  • Asset Management

Of course, there are also advantages and disadvantages of investment banking; knowing them can help you stay ahead of the game.

The advantages include helping investors raise capital for sales with the ability to underwrite securities to acquire, combine or sell. Investment bankers can help clients invest their money in the best way to get more value from their investments.

The disadvantages could include unexpected events from the economy or stock markets. There may also be business, systemic, and reputational risks. Each bank has departments to ensure that preventive measures are taken to avoid such events.

Now that you understand the differences between investment banking and private equity, you can make an educated decision on what works best for your investment funds. They both come with advantages and risks, but you’ll have to determine whether the benefits outweigh the risks. If you’re looking for investment ideas or wanting to get investors, check out various marketplaces, such as Finnovating where you can sign up for free.

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