Mergers and acquisitions (M&A) are important transactions in the financial world with businesses buying other companies and assets, or two or more entities coming together to form a single corporation. Just over the past two years, M&A deal value added up to nearly $7 trillion worldwide

This huge volume of M&A activity drives an industry all of its own, including a vast array of institutional investors, advisors, and researchers, which can be classed as either “buy-side” or “sell-side”. 

In this article, we’ll take a look at what exactly is the buy-side, what is the sell-side, and what are each side’s objectives and practices.

What is the buy side?

The buy side encompasses fund managers, often called institutional investors. Fund managers gather capital from investors and allocate them across a variety of assets classes. Their main goal is establishing good investment opportunities and securing a profitable return on the invested capital.

What is the sell side?

The sell-side is essentially the investment banking industry. An investment bank helps companies raise debt and equity capital, which is then sold to institutional investors — among which are mutual funds, hedge funds, and insurance companies.

Buy-side vs sell-side M&A: Key differences

What are the main differences between buy-side and sell-side M&A activities? Let’s take a look.

Buy-side institutions actively seek out investment opportunities for clients. Their goal is to capitalize on potential growth. They are usually funds, such as hedge or mutual funds, as we’ll see below.

Sell-side players, on the other hand, are most often investment banks. They specialize in assisting businesses to raise funds and sell their assets or securities, ensuring smooth transaction processes. While the buy-side pursues growth, the sell-side helps companies raise capital and achieve successful deals.

More about buy-side M&A

Buy-side M&A encompasses a range of activities, including:

  • Gathering customer funds
  • Market research and evaluation of potential targets
  • Drafting investment strategies 
  • Advising clients as to their investments

The most common buy-side institutions are investment funds — companies that pool their clients’ money and invest it in different types of assets. The main types of investment funds include mutual funds, hedge funds, and private equity. 

Mutual funds

Mutual funds are managed by professionals, including portfolio managers, analysts, and traders, and invest in a diversified portfolio of stocks, bonds, and other securities. Mutual funds aim to generate a safe return for its investors, diversifying risk across different kinds of assets.

Most mutual funds are open-end, meaning there’s no limit to the amount of shares they can issue. As of 2022, the value of mutual fund assets worldwide exceeded 60 trillion dollars.

Hedge funds

Hedge funds are somewhat similar to mutual funds, but there are important differences. Much like mutual funds, hedge funds also employ the same class of professional managers, analysts, and so on. However, where mutual funds are open for anyone to buy into, hedge funds are private businesses that typically only work with very wealthy clients. They also take up a smaller share of the institutional investor pie — just over five trillion dollars, as of 2023.

Hedge funds also typically pursue more risky strategies, including shorting and leveraged positions. This stands in contrast to most mutual funds’ more conservative approach to investment. 

Private equity firms

Another important buy-side player, private equity firms are quite different from hedge funds. Their focus is on acquiring and actively managing private businesses, rather than simply acquiring an interest in those businesses.

Private equity firms will often invest their capital funds into acquired businesses, undertaking actions such as restructuring, operational or financial optimization, strategic acquisitions, and leadership shakeups. Common PE firm procedures include the “buy-and-build” strategy, where complementary businesses are acquired by an existing “platform” investment company, and then used to expand its offerings, customer base, and market share.

The value of private equity capital has been increasing, and amounted to $2.3 billion worldwide as of 2022

Other buy-side investors

Banks, insurance companies, endowment funds, and pension funds are all relevant figures in the buy-side spectrum of M&A. They can invest either directly in capital markets or through funds such as mentioned above.

An example of the buy-side in action

Here’s an imaginary, but very typical scenario that illustrates a scenario with prospective buyers and investment bankers working in tandem.

A certain private equity firm employs several professionals, such as portfolio managers, risk analysts, and traders. One day, an investment banker from a major investment bank calls the head portfolio manager and announces a potential investment opportunity: two alternative energy companies are concluding a merger and will be launching an upcoming initial public offering (IPO) in the near future.

Once the opportunity has been carefully considered by the firm’s analysts and presented to the board, a decision is made to acquire a number of IPO shares. This purchase of securities ensures a cash flow from buy-side to sell-side and helps set the IPO in motion.

M&A buy-side breakdown

GoalsIdentify and capitalize on lucrative investment opportunities
Generate substantial returns for clients
StructureComprises asset managers, buy-side analysts, equity research analysts, traders, and the investors themselves
Typical playersMutual funds, hedge funds, private equity, banks, endowment and pension funds, insurance companies
RoleConduct due diligence process and evaluate target companies or other assets as potential investments
Formulate investment strategies, determining when to buy, hold, and sell assets
Manage clients’ investments
Provide advice and consultation on investment decisions, perform financial modeling and valuations

More about sell-side M&A: Investment banks

Investment banks are the key players in sell-side mergers and acquisitions, acting as intermediaries between, on the one hand, institutional investors or acquiring companies and, on the other, the businesses being acquired. 

Investment banking workers include investment bankers, traders, sales representatives, and analysts for conducting internal research.

Typical ways in which investment banks play the role of an intermediary include:

  • Helping companies organize and launch initial public offerings (IPOs)
  • Assisting businesses with raising money and selling traded securities
  • Brokering mergers between competing businesses
  • Organize public companies’ launch of additional stock offerings or accelerated share buybacks

In these and similar major transactions, an experienced investment bank is tasked with ensuring the selling company’s financials and issuing an advisory to help orient and attract interested investors.

Investment banking takes up a significant space in the financial industry, and is worth upwards of $80 trillion. Prominent global investment banks include names such as JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank. 

M&A sell-side breakdown

GoalsFacilitate large-scale financial transactions, including M&A, IPOs, stock issuance, and buybacks
Ensure deals are concluded seamlessly and in compliance with relevant legislation
StructureIncludes investment bankers, traders, sell-side analysts, compliance officers, risk managers
Typical playersInvestment banks
RoleAct as financial advisors, leveraging an understanding of the industry and their clients’ needs to spot opportunities and challenges
Facilitate mergers and acquisitions as a key intermediary, helping target companies raise money
Research and report on financial/economic health of companies, including prospective clients
Issue “Buy”, “Hold”, and “Sell” ratings, as well as other advisory for clients and the general public

Key takeaways

M&A is a vast and diverse world within the even vaster universe of the financial market, and it is dominated by a set of institutions that are divided between buy-side and sell-side. 

The buy-side is made up of professional investing firms that look out for opportunities to put their clients’ money to good use through the acquisition of different classes of assets, including bonds and stocks, or even companies themselves.

The sell-side consists mainly of investment banks — large banks whose main responsibility is to raise capital for their clients and broker large financial transactions such as IPOs or mergers and acquisitions, ensuring a smooth process for all parties involved.