Institutional investors are organizations which pool large sums of money and invest those sums in companies. They include
bankA bank is a financial institution licensed by a government. Its primary activities include borrowing and lending money.Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds...
s,
insurance companiesInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
, retirement or
pension fundA pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits....
s,
hedge fundA hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds, and that, in general, pays a performance fee to its investment manager...
s and
mutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis...
s. 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.
Institutional investors are organizations which pool large sums of money and invest those sums in companies. They include
bankA bank is a financial institution licensed by a government. Its primary activities include borrowing and lending money.Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds...
s,
insurance companiesInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
, retirement or
pension fundA pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits....
s,
hedge fundA hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds, and that, in general, pays a performance fee to its investment manager...
s and
mutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis...
s. 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
portfolioPortfolio may refer to:* Portfolio , a collection of investments held by an institution or a private individual* Portfolio , the post and responsibilities of a head of a government department* A type of briefcase...
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
corporationA corporation is a legal entity separate from the shareholders and employees. In British tradition it is the term designating a body corporate, where it can be either a corporation sole or a corporation aggregate...
s because they will be entitled to exercise the voting rights in a company. They can engage in active role in
corporate governanceCorporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is...
. 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 managementInvestment management is the professional management of various securities and assets , to meet specified investment goals for the benefit of the investors...
.
Overview
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 StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a private placement under Rule 506 of Regulation D may be made to an "
accredited investorAccredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments, limited partnerships, hedge funds, and angel investor networks...
" 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
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
, 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.
Institutional investor types
- Pension fund
A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits....
- Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis...
- Investment trust
A Investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies.- Organisation :...
- Unit trust
A unit trust is a form of collective investment constituted under a trust deed.Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore, and the UK, unit trusts offer access to a wide range of securities....
and Unit Investment TrustA Unit Investment Trust is a US investment company offering a fixed portfolio of securities having a definite life. UITs are assembled by a sponsor and sold through brokers to investors....
- Investment banking
An investment bank is a financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions. Investment banks profit from companies and governments by raising money through issuing and selling securities in capital markets and insuring bonds An investment...
- Hedge fund
A hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds, and that, in general, pays a performance fee to its investment manager...
Regional
In various countries different types institutional investors may be more important. In
oil-exporting countriesThe Organization of the Petroleum Exporting Countries is a cartel of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular...
sovereign wealth fundA sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial...
s are very important, while in
developed countriesThe term developed country is used to describe countries that have a high level of development according to some criteria. Which criteria, and which countries are classified as being developed, is a contentious issue and there is fierce debate about this. Economic criteria have tended to dominate...
,
pension fundA pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits....
s may be more important.
Canada
In Canada, both pension funds and government funds are powerful investors in the market with hundeds of billions of dollars in assets in an economy of only around one trillion dollars. The most important being:
- Caisse de dépôt et placement du Québec
The Caisse de dépôt et placement du Québec manages public pension plans in the Canadian province of Québec. It was founded in 1965 by an act of the National Assembly...
(C$The Canadian dollar is the currency of Canada. It is normally abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies. It is divided into 100 cents...
237.3 billion [2007])
- Canada Pension Plan
The Canada Pension Plan is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old Age Security...
(C$116.6 Billion [2007])
- Ontario Teachers' Pension Plan
The Ontario Teachers' Pension Plan , commonly referred to as Teachers, is the organization responsible for administering pensions for public school teachers of Ontario. The OTPP also invests the plan's pension fund, making it one of the largest and most powerful investment groups currently...
(C$106 billion [2006])
- British Columbia Investment Management (C$83.4 billion [2007])
- Alberta Investment Management
Alberta Investment Management Corporation is one of Canada's largest institutional investment fund managers. Established as a crown corporation on January 1st, 2008, it manages nearly C$70 billion on behalf of the province of Alberta...
(C$73.3 billion [2007])
United Kingdom
In the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in the
City of LondonThe City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
'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.
The major investor associations are:
- Investment Management Association, website here
- Association of British Insurers
The Association of British Insurers or ABI is a trade association made up of insurance companies in the United Kingdom. According to the group, around 400 companies work in the ABI, and they provide 94% of all the domestic insurance services sold in the country...
, website here
- National Association of Pension Funds
Founded in 1923, the National Association of Pension Funds is the leading body in the UK for providing representation and other services to those involved in designing, operating, advising and investing in all aspects of workplace pensions...
, website here
- The Association of Investment Trust Companies
The Association of Investment Trust Companies is the United Kingdom trade body for the investment trust industry. It was formed in 1932.-External links:*...
, website here
The IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association are also represented by the Institutional Shareholder Committee.
See also
- Foreign Institutional Investor, an institution which invests in the financial markets of a country which is different from where it is incorporated
- Private Placement
A private placement is a funding round of securities which are sold without a initial public offering, usually to a small number of chosen private investors...
- Investment management
Investment management is the professional management of various securities and assets , to meet specified investment goals for the benefit of the investors...
- Global assets under management
Global asset allocation or Global assets under management consists of pension funds, insurance companies and mutual funds. Other funds under management include private wealth and alternative assets such as hedge funds and private equity...
External links