Buy-Side vs. Sell-Side: What do Investment Bankers make?

Here we are, the classic debate about buy-side vs. sell-side. Being around investment banking and finance firms for several years now, I have heard many arguments.

“I hear everyone at hedge funds makes at least $1 million and gets teslas for signing bonuses.”

You may have heard about the buy-side vs. sell-side differentiation everywhere; online, message boards, or even in real life. (Do we even remember what that is like?)

The big problem is that categorizing it like this is missing the boat. A quick Google search will tell you that, “On the sell-side, you pitch products such as stocks, bonds, or entire companies in the case of M&A, and you persuade investors to buy them. On the buy-side, you raise capital from investors and then make your own decisions on where to invest it and what to buy.”

To someone on the outside, this seems easy enough to digest…right?

You are either earning money via commissions on sales or earning money by investments that provide a return.

• Sell-Side: Investment Banking, Sell-Side Research, (Some) Trading at Banks
• Buy-Side: Private Equity, Hedge Funds, Buy-Side Research, Prop Trading, Venture Capital, Asset Management, Other Types of Miscellaneous “Investment Firms”

Many think that the buy-side is a better life because there is more potential in investing than commissions. Now, this might be technically true, the best kind of true, but far from the average outcome.

So what are the real differences?

The easiest way to differentiate is between the pay, hours, and type of work. But that is hardly all!

First, let’s take a look at some funny yet wrong assumptions:

• Pay: You become wealthy on the buy-side because you’ll be a better investor than Warren Buffett and get 80% returns every year!
• Hours: In addition to better pay, you also barely work on the buy-side because you’re such a baller that bankers, traders, and brokers answer your every call and deliver mermaids and private islands to your doorstep every day all in a feeble attempt to win your business.
• Type of Work: While the work is mind-numbingly boring on the sell-side, on the buy-side, you’re doing intellectually stimulating tasks all day and changing the world!
• Structure of Firms: There’s too much hierarchy on the sell-side, so it’s harder to advance. But on the buy-side, you’ll move up the ranks quickly because the hierarchy is flatter, and they reward top performers!

Okay, that last one might actually be true. Many firms on the buy-side tend to have a flat structure, but this is not specific to just the buy-side. You can find it on the sell-side too.

But here is the bombshell, most of the distinctions, you don't hear much about or little mention of…boom!

Deals vs. Public Markets

Let’s move away from buy-side vs. sell-side and focus on Deals or work in Public Markets. That is how we should chop it up.

• Deals: Investment Banking, Private Equity, and Venture Capital
• Public Markets: Hedge funds, buy/sell-side research, prop trading, and asset management

If you are buying entire companies like we saw Salesforce do with Slack, then they are on the Deals side…everything else would fall in the Public Markets portion.

Let’s break this down a bit further. Deals mean that you are hammering away in the M&A area. A personal favorite of mine. This is debt offerings, IPOs, and major transactions. An entire company is being bought or sold here, people!! Basically massive shit.

Some might say, VC doesn't belong here! Perhaps, but the actual process of investing as a VC is very time-consuming and resembles the work you would see in the Investment Banking world and Privet Equity. Believe me; I had done hours of research on VCs and Investment Banking when I was working with Affinity to launch their CRM product for Investment Banking, though DealCloud is a much better platform, in my opinion.

The Work Breakdown: Buy-side, sell-side.

First off, this work is not just buying shares. If it were, we all would be doing it. You are pitching dozens of potential buyers. You are creating tons of marketing materials. You (or your due-diligence monkey(s)) are crunching the financials and valuation work. Then you get to negotiate agreements. It sounds fun already!

If you are the buyer, you can skip the first couple of steps and jump right to due diligence; lucky you! You get to dig into all the material available on the company you are interested in.

These are long cycles and long relationships. A single deal might take several months or even years to close. This process is a lot like a marathon. Yes, you are always working. There is some downtime, but this is an exhaustive Worklife and very stressful.

On the public markets side, it's more of a sprint instead of a marathon. Here there is zero downtime, you are basically working consistently, and you can not lose your focus.

But on the public market side, the investment cycle is much shorter. Even so, this requires subtle patience and super-powered negotiation skills. You get to go home…only after all your work is finished.

The hours

• Deals: The hours are more unpredictable because you never know when a huge deal will heat up and when you’ll get slammed with work at the last minute. Venture capital may be an exception, but even there, you could always get busy when closing a deal.
• Public Markets: Your life is more predictable because you work market hours. You may have to get in before the market opens and stay after the market closes, but it’s not like Investment Banking where you might get called in at 2 AM to fix a random problem that a client is complaining about.

Stress

Because hours can be unpredictable, stress is a present factor. Each role has it owns individual stressors. For example, in banking, and to some degree PE, the stress is typically around the fact that your deal is falling apart and you are expected to repair it quickly. Even if it is Saturday night and your leadership is telling you to return to the office.

Public market roles will see less of the work following you outside the office, though not completely — but when you are at the office there is little to no downtime.

For example, a trader will probably need to watch their positions every ticking second of the day. And if they have to leave, even for a bathroom break, they will most likely need to find a cover. Yea, it is that crazy that a bathroom break can make or break you. Those seconds can define you.

Cool Factor

I often hear this argument come up too, which is more interesting. It's hard to place a winner here because there is no real answer.

Many would reflect that much of the work you do on deals in grunt work — but the same can be said for Public Market roles. It really just depends on what you personally enjoy.

In the public market, you might not be fixing font sizes, but there is plenty of data combing and report filtering just to support your portfolio manager or research analysts.

Again, what do you personally find interesting. That should be your guiding star. Do you enjoy following the stock markets? If so you might find public markets interesting.

However, if you find business, in general, more interesting and don't show much interest in the stock market, Deals is probably a better role, allowing you to buy entire companies.

Personally, Deals work is very exciting to me. Which each new company there is a new and exciting story that you get to be a part of or even write the next couple of chapters. However, I also enjoy following stocks. At the end of the day, the amount of time you spend in either will really determine your individual correct answer.

Cash Money!

The best part, and arguably the reason why you clicked on this link. Money!

Well, I have disappointing news for you — on average the buy-side pay vs the sell-side pay is not that much different. That being the case, there is a much higher top on the buy-side. But getting to that mountain will take plenty of time.

The reason why you might be able to make more on the buy-side is that if you invest well, the sky is the limit. It is not uncommon to see a hedge funder manager cash out in millions when they have a great year.

On the sell side, your ceiling is a bit lower for partners and managing directors. The factor here is time. It is limited in this scenario and you are only able to do so much in a specific amount of time.

We won't go into exact numbers here but year by year, earning more than a few million USD at the managing director level in investment banking is rare. If the economy is lit up and you are a senior member it becomes a bit easier to maximize your gains.

The average pay for hedge funders is around $326k. And only about the top 4 or 5% will take home $1 million dollars.

Advancement

The difference in pay is a great segway into the difference in advancement. In both deals and public markets, it is a grow or die culture. And it is vicious to boot. If you can deliver exceptional results, generate fees, and high returns you are golden. If not you are gone. And there is a likelihood that you won't be coming back if you fail, they all talk with each other.

That being the case for investment banking the structure is much more defined and follows a path. It will come down to your successes, hard work, and the number of years you put in at a specific company.

Typically we see that it will take around 3 years to move from analyst to associate. Add on another 3 or 4 years to grow to the VP title. There is very little you can do to speed up the process. So get comfortable or go home.

Now, let's compare that with the public market roles. Here advancement is correlated with your direct impact and performance. There is also a bit of luck to be had here.

It comes down to how you set yourself apart in these different roles. Make a big splash and find yourself climbing the ladder.

The Exit Door

I’ll be blunt here, it is difficult to move from a Deals role to a Public Market role, not impossible but few examples to point to.

This is typically why you see bankers going into PE. Similarly, you will see traders move from a bank to a hedge fund or asset management firm but not into corporate development.

Your exit opportunities depend on whether you are a Deals ninja or a Public Markets ninja.

Which Side Is For You?

It comes down to personal goals, and desires. There is a flaw in pitting Deals vs Public Markets, the pay differences are strongly linked to the buy-side vs sell-side.

Sit down and determine what type of work-life balance you are looking for. Do you want predictable hours? How do you handle stress? Do you need advancement to be happy in life?

What is important is that you move away from thinking about the buy-side vs sell-side. The next time you witness a heated debate on this topic, please punch them in the face…then send them this link. The hype always fades but the truth shines strong.

Scott Guttenberger