Investing is about a careful approach and deep knowledge. Understanding the difference between investment banking and private equity is one of the fundamental issues. Here we shed some light on each of these terms, highlighting their characteristics. You will also learn about how data rooms support equity research.
What is private equity?
A private equity company is a group of investors who operate pools of investment capital. The sources of these pools are insurance companies, trust funds for non-commercial use, pension funds, philanthropists, etc.
Private equity profit is based on receiving large pools of capital and earning interest from them.
What is investment banking?
Investment banking is like a real estate agent. However, they don’t deal in properties but businesses.
Unlike private equity, investment banking is a consulting service for raising capital, M&A, and restructuring.
Private equity vs. investment banking
The distinguishing features are:
- Private equity is an investment sector business, while investment banking is involved in raising funds.
- Private equity has capital injection as an advantage, and investment banking has expertise in various transactions and operations.
- Private equity clients deposit a certain amount of money, and investment banking does not charge anything.
- As already mentioned, private equity does not provide consulting services.
Why are equity research companies important?
Information is one of the essential components of successful financial planning, M&A, and investment. Equity research firms collect data so that their clients can handle the above operations with their insight. Qualified specialists on the part of both the seller and the buyer do this work.
The purpose of sell-side research firms:
- To advise on major transactions. Consultants better understand the context, which is why they are more likely to advise how to secure major investments.
- To help in raising capital. In addition, professionals support sales and trade based on the firm’s ratings.
- To assist in mergers and acquisitions. Analysts raise awareness of M&A deals and engage buyers. They also model and value a company.
- To build financial modeling. This abstract representation consists of historical and forecasted information. The focus is on quarterly results.
The purpose of buy side equity research:
- To solve investment issues. It is about buying, holding, and selling.
- To increase assets under management. For investors, this aspect is an indicator of quality. It helps to assess the size of the enterprise’s operations in comparison with others.
- To achieve better risk-adjusted profitability. To ensure that the risks are limited, they research and analyze organizations. Analysts also ensure that potential investments do not conflict with the company’s mission.
«Risk comes from not knowing what you’re doing.» This is how one of the most prominent American investors, Warren Buffett, emphasizes the importance of research.
The crucial role of equity research is a detailed analysis that carries valuable information to the market. Its absence would lead to companies using distorted stock data. Thus, investors make smarter decisions. They are aware of the firm’s strengths and weaknesses.
How data rooms improve equity research
Since equity research is directly attributable to valuable information, a data room is an in-demand tool. Providers offer:
- Setting access levels. This feature prevents the illegal use of data.
- Organizing large amounts of data. Consequently, users easily access any file using the Search function.
- Keeping in touch with partners thanks to built-in communication tools. Communication takes place in a secure environment.
- Complying with international data protection standards that gained the trust of the best equity research firms. (ISO, SOC 1 or 2, GDPR)
- Gaining confidence in the smooth flow of all asset life cycle stages secured by data protection mechanisms.