Private Equity, Assest Management and Investment Banking?

Question

I feel i get the gist of how these three differ. But I'm not entirely sure. Could someone define and describe these please?

Answer 1

PE's are private companies (not listed on exchanges) who usually take over all or part of other businesses equity (and voting voices) in order to take control the management using different types of strategies (LBO's, Venture Capital, Growth capital, Distressed, Mezzanine ...) PE's invest their money into companies in order to take them over, influence their management and/or finance a capital-strapped company on advantageous terms all in the objective of benefiting from long term return on equity.

Asset management firms are rather intermediaries who advise and invest in and manage funds on behalf of their clients. These firms apply " financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring" in order to provide portfolios that fits the needs, objectives and risk tolerance of their clients and reach the optimal return for the given risk. They are not behind a specific stock, company, bond or any other asset class (that might include PE), they just manage the allocation of funds among these.

Investment banking is a little bit fuzzy word, but in its strict meaning, it refers to firms that help in the securitization, security issuance (equity or bonds), IPO's, mergers and acquisitions, underwriting, ... So, investment banks do not actually own the shares they help issue in case of an IPO (well sometimes they do) but it is only with the intention of selling them on the secondary market, with hopefully high enough spreads.

So few criteria to distinguish between the 3 if you will is the level of ownership of assets, degree of involvement and holding horizon. I would rank the 3 companies from 'high' on all these 3 criteria (PE) to 'low' (IB). PE's make big and long term commitments by taking over a majority or minority parts of a company (think about Cerberus in GMAC) in order to either influence its management or take advantage of a long-term capital need. Asset managements only construct portfolios of different assets on behalf of their clients and do not own these assets themselves (If one asset loses value, only investors holding that specific asset lose money, the AM company itself do not incure any loss, whereas for an PE, if a company make a loss, the loss is reflected in the value of PE and all investors in PE take that loss). IBs theoretically do not get involved in the asset price or value beyond their function as advisors and underwritters (well they could lose money in some cases)