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Investment Banking vs. Private Equity in Commercial Real Estate

The available career opportunities surrounding commercial real estate are endless. This is a field that offers so many types of different jobs, from landlords to appraisers, from property managers to paralegals, it has the tendency to attract experts from a wide variety of professions. Some boast legal backgrounds, others are proficient in sales, while some come from the world of banking and finance.

Investment banking and private equity are part of this universe and despite the fact that both occupations strive for the same goal, they’re extremely different in their approach to reach that goal. These two lines of work are often used interchangeably even though they’re two distinctive professions with different methods and techniques. Let’s take a closer look at the differences between investment banking and private equity and showcase their respective roles in commercial real estate.

The key difference between the two professions is that investment banking is mostly about raising capital and offering professional advice, while private equity focuses on the investment rather than on consultation.

When entering the profession, investment banking associates have three major responsibilities: they deal with pitchbook creation, modeling various projects, and administrative work.  Investment banking companies mainly deal with creating capital for other entities by underwriting new debt, aiding in the sale of securities, and helping mergers and acquisitions.

These companies offer guidance regarding the buying-selling process and the placement of stocks. Initial public offerings also fall into the list of responsibilities an investment banker deals with. They help source capital for various projects, determine the optimal stack, and secure the funding for a project in exchange for an impressive fee.

Investment bankers don’t necessarily execute mergers, acquisitions, and spin-off transactions, instead they mostly advise and act as a broker between the investors and the companies interested in commercial real estate projects.

Those interested in becoming investment bankers should strive for a degree in mathematics, accounting, finance or economics. By pursuing a MBA, you basically raise your chances of becoming a sought-after investment banker as well as your potential earnings as a commercial real estate professional in this line of work.

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In contrast, private equity funds are not advisers, but investors. Private equity deals with sourcing investment capital from high-income individuals, philanthropists, pension funds, and endowments, and then actually invests the raised money on behalf of the client in the development and acquisition of commercial real estate assets. They are called private for the simple reason that the fund’s investments are not made public and are not traded in the stock market.

Private equity associates are active in four different fields: fundraising, managing investments and portfolio companies, screening for investments, and then making them and building up an exit strategy. Since the work is based on performance, a large part of how the investment goes influences their pay. Therefore, the competition is fierce and these associates are much closer to the “action” than investment bankers are.

Both professions offer quite an impressive salary, but you can receive a much larger sum in the private equity world for the simple fact that if investment prices grow, your percentage grows along with it. If you’re not clear about which path you’d like to take, we recommend you try out both!

You can start by polishing your skills in investment banking, getting to know the ins and outs of the business and growing a solid foundation within the commercial real estate industry. This way you’ll be at the heart of capital markets. Once you’ve mastered these skills and acquainted yourself with the business, you can always move to doing more banking, working in start-ups or maybe even specialize in private equity, especially if you want to work on the buy side.

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