Institutional investor

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Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets.

Types of typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment.

Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management.

Contents 1 History 1.1 Ancient Rome and medieval Islam 1.2 Pre-industrial Europe 1.3 Before 1980 2 Overview 3 Economic theory 3.1 Institutional investors as financial intermediaries 3.2 ”Doing God’s work” 3.3 Life cycle 4 Institutional investor types 5 Globalization of financial markets 6 Regional 6.1 Canada 6.2 United Kingdom 7 See also 8 Notes 9 References 10 External links

[edit] History

[edit] Ancient Rome and medieval Islam

Roman law ignored the concept of juristic person, yet at the time the practice of private evergetism sometimes led to the creation of revenues-producing capital which may be interpreted as an early form of charitable institution. In some African colonies in particular, part of the city’s entertainment was financed by the revenue generated by shops and baking-ovens originally offered by a wealthy benefactor. ^[1] In the South of Gaul, aqueducts were sometimes financed in a similar fashion. ^[2]

The legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law. The waqf (charitable institution) became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments. ^[3] Alongside some Christian monasteries ^[4] the waqfs created in the 10^th century CE are amongst the longest standing charities in the world (see for instance the Imam Reza shrine).

[edit] Pre-industrial Europe

Following the spread of monasteries, almhouses and other hospitals, donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. In the process, over the centuries those institutions acquired sizable estates and large fortunes in bullion. Following the collapse of the agrarian revenues, many of these institution moved away from rural real estate to concentrate on bonds emitted by the local sovereign (the shift dates back to the 15^th century for Venice, ^[5] and the 17^th century for France^[6] and the Dutch Republic ^[7]). The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated, they commonly possessed 10 to 30% of a given region arable land. In the 18^th century, private investors pool their resources to pursue lottery tickets and tontine shares allowing them to spread risk and become some of the earliest speculative institutions known in the West.

[edit] Before 1980

Following several waves of dissolution (mostly during the Reformation and the Revolutionary period) the weight of the traditional charities in the economy collapsed; by 1800, institutions solely owned 2% of the arable land in England and Wales. ^[8] New types of institutions emerged (banks, insurance companies), yet despite some success stories, they failed to attract a large share of the public’s savings and, for instance, by 1950, they owned only 7% of US equities and certainly even less in other countries. ^[9]

[edit] Overview

Financial market
participants

Collective investment schemes Credit unions · Insurance companies Investment banks · Pension funds Prime brokers · Trusts

Finance series

Financial market · Participants Corporate finance · Personal finance Public finance · Banks and banking Financial regulation

v · d · e

Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. For example, in the United States, a private placement under Rule 506 of Regulation D may be made to an "accredited investor" without registering the offering of securities with the Securities and Exchange Commission. In essence institutional investor, an accredited investor is defined in the rule as:

• a bank, insurance company, registered investment company (generally speaking, a mutual fund), business development company, or small business investment company;
• an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
• a charitable organization, corporation, or partnership with assets exceeding $5 million;
• a director, executive officer, or general partner of the company selling the securities;
• a business in which all the equity owners are accredited investors;
• a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
• a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
• a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

[edit] Economic theory

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By definition, institutional investors are opposed to individual actors on the financial markets. This specificity has majors consequences in the eyes of economic theory.

[edit] Institutional investors as financial intermediaries

Numerous institutional investors act as intermediaries between lenders and borrowers. As such, they have a critical importance in the functioning of the financial markets. Economies of scale imply that they increase returns on investments and diminish the cost of capital for entrepreneurs. Acting as savings pools, they also play a critical role in guaranteeing a sufficient diversification of the investors’ portfolios. Their greater ability to monitor corporate behaviour as well to select investors profiles implies that they help diminish agency costs.

[edit] ”Doing God’s work”

The expression “doing God’s work”, commonly used by employees of institutional investors to describe their job, refers to the fact that their professionalism and greater computing abilities allow them to detect early –and benefit from– information affecting the markets. By doing so, institutional investors make the markets more efficient.

[edit] Life cycle

Institutional investors differ among each other but they all have in common the fact of not sharing the same life cycle as human beings. Unlike individuals, they do not have a phase of accumulation (active work life) followed by one of consumption (retirement), and they do not die. Here insurance companies differ from the rest of the institutional investors, as they cannot guess when they will have to repay their clients, they need highly liquid assets which reduces their investment opportunities. Others like pension funds can predict long ahead when they will have to repay their investors allowing them to invest in much less liquid assets such as private equities, hedge funds or commodities. Finally, other institutions have an investment horizon extremely vast allowing them to invest in highly illiquid assets since they are unlikely to be forced to sell them before term. A famous example of this type of investors are US universities endowment funds.

[edit] Institutional investor types

• Pension fund
• Mutual fund
• Investment trust
• Unit trust and Unit Investment Trust
• Investment banking
• Hedge fund
• Sovereign wealth fund
• Endowment fund
• Private equity firms
• Insurance companies

[edit] Globalization of financial markets

When considered from a strictly local standpoint, institutional investors are sometimes called foreign institutional investors (FIIs). This expression is mostly used in emerging markets such as Malaysia and India.^{[citation needed]}

In countries like India, statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs represented the largest institution investment category, with an estimated US$ 751.14 billion.^[10]

[edit] Regional

In various countries different types of institutional investors may be more important. In oil-exporting countries sovereign wealth funds are very important, while in developed countries, pension funds may be more important.

[edit] Canada

The most important Canadian institutional investors are:

• Caisse de dépôt et placement du Québec (C$237.3 billion [2007])
• Canada Pension Plan (C$116.6 Billion [2007])
• Ontario Teachers' Pension Plan (C$106 billion [2006])
• British Columbia Investment Management (C$83.4 billion [2007])
• Alberta Investment Management (C$73.3 billion [2007])

[edit] United Kingdom

In the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in the City of London's square mile. Their wealth accounts for around two thirds of the equity in public listed companies. For any given company, the largest 25 investors would have be able to muster over half of the votes.^[11]

The major investor associations are:

• Investment Management Association^[12]
• Association of British Insurers
• National Association of Pension Funds
• The Association of Investment Trust Companies

The IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association are also represented by the Institutional Shareholder Committee.

[edit] See also

• Private placement
• Investment management
• Global assets under management

[edit] Notes

[edit] References

Articles

• AA Berle, ‘Property, Production and Revolution’ (1965) 65 Columbia Law Review 1
• LW Beeferman, “Pension Fund Investment in Infrastructure: A Resource Paper”, Capital Matter (Occasional Paper Series), No.3 December 2008
• BS Black and JC Coffee, ‘Hail Britannia?: Institutional Investor Behavior under Limited Regulation’ (1994) 92(7) Michigan Law Review 1997
• G Clark and A Clark, 'Common Rights to Land in England, 1475-1839' (2001) 61(4) The Journal of Economic History 1009
• JC Coffee, ‘Liquidity versus Control: The Institutional Investor as Corporate Monitor’ (1991) 91 Columbia Law Review 1277-1368
• PL Davies, ‘Institutional investors in the United Kingdom’ in T Baums et al, Institutional Investors and Corporate Governance (Walter de Gruyter 1994) ch 9
• MN Firzli & V Bazi, “Infrastructure Investments in an Age of Austerity : The Pension and Sovereign Funds Perspective”, USAK/JTW July 30 2011 and Revue Analyse Financière, Q4 2011
• KU Schmolke, ‘Institutional Investors’ Mandatory Voting Disclosure: The Proposal of the European Commission against the Background of the US Experience’ (2006) EBOLR 767

Books

• A Chandler, The Visible Hand (1977)
• PL Davis et al, Institutional Investors (MIT Press 2001)
• MC Jensen (ed), Studies in the Theory of Capital Markets (F. Praeger 1972)
• GP Stapledon, Institutional Shareholders and Corporate Governance (Oxford 1996)

[edit] External links

• Institutional Investor Magazine

v · d · eInvestment management Collective investment scheme structures Common contractual fund · Fond commun de placement · Investment trust · Unit trust · Mutual fund · ICVC · SICAV · Unit Investment Trust · Exchange-traded fund · Offshore fund · Unitised insurance fund Investment styles Active or Passive management · Value or Growth investing · Hedge fund · Socially responsible investing · Impact investing · Fund of funds · Manager of managers · Index fund Theory and terminology Efficient-market hypothesis · Net asset value · Open-end fund · Closed-end fund Related topics List of asset management firms · Umbrella fund · UCITS

v · d · eTopics on private equity and venture capital Basic investment types Buyout • Venture • Mezzanine • Growth • Secondaries • Equity co-investment History History of private equity and venture capital • Early history of private equity • Private equity in the 1980s • Private equity in the 1990s • Private equity in the 2000s Terms and concepts Buyout Financial sponsor • Management buyout • Divisional buyout • Buy-sell agreement Venture Seed money • Startup company • Angel investor • Venture capital financing • Pre-money valuation • Post-money valuation • Venture round • Venture debt • Bootstrap funding Structure Private equity firms and funds • Limited partnership • Limited liability company • Carried interest  • Management fee • Publicly traded private equity (Business Development Company, Venture Capital Trust) • Private Investment in Public Equity (PIPE) • Pledge fund Investors Institutional investors • Pension funds • Insurance companies • Fund of funds • Endowments • Foundations • Investment banks • Merchant banks • Commercial banks • High net worth individuals • Family offices • Sovereign wealth funds Related financial terms Undercapitalization • Initial Public Offering (IPO) • M&A • Leverage • High-yield debt • Capital structure • Capital call • EBITDA • IRR • Envy ratio Private equity and venture capital investors • Private equity firms • Venture capital firms • Angel investors • Portfolio companies