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. 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. An institutional investor can have some influence
in the management of corporations because it will be entitled to exercise the voting
rights in a company. Thus, it 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.
History Ancient Rome and 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. In the South of Gaul, aqueducts were sometimes
financed in a similar fashion. 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 became a cornerstone
of the financing of education, waterworks, welfare and even the construction of monuments.
Alongside some Christian monasteries the waqfs created in the 10th century AD are amongst
the longest standing charities in the world. 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
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 18th 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. Before 1980
Following several waves of dissolution the weight of the traditional charities in the
economy collapsed; by 1800, institutions solely owned 2% of the arable land in England and
Wales. New types of institutions emerged, 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.
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 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 U.S. Securities and Exchange Commission.
In essence institutional investor, an accredited investor is defined in the rule as:
a bank, insurance company, registered investment company, 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.
Economic theory By definition, institutional investors are
opposed to individual actors on the financial markets. This specificity has majors consequences
in the eyes of economic theory. 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.
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 followed by one of
consumption, 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 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.
Institutional-investor types
Globalization of financial markets When considered from a strictly local standpoint,
institutional investors are sometimes called foreign institutional investors. This expression
is mostly used in emerging markets such as Malaysia and India.
In countries like India, statutory agencies like the Securities and Exchange Board of
India 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. 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. Japan
Japan is home to the world's largest pension fund and is home to 63 of the top 300 pension
funds worldwide. These include: Government Pension Investment
Local Government Officials Pension Fund Association
Canada The most important Canadian institutional
investors are: Canada Pension Plan
Caisse de dépôt et placement du Québec Ontario Teachers' Pension Plan
British Columbia Investment Management Alberta Investment Management
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 to be able to muster
over half of the votes. The major investor associations are:
Investment Management Association 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.
See also
Global assets under management Investment management
Private placement List of institutional investors in the United
Kingdom
Notes
References Articles
AA Berle, "Property, Production and Revolution" 65 Columbia Law Review 1
LW Beeferman, "Pension Fund Investment in Infrastructure: A Resource Paper", Capital
Matter, No.3 December 2008 BS Black and JC Coffee, "Hail Britannia?:
Institutional Investor Behavior under Limited Regulation" 92(7) Michigan Law Review 1997
G Clark and A Clark, "Common Rights to Land in England, 1475–1839" 61(4) The Journal
of Economic History 1009 JC Coffee, "Liquidity versus Control: The
Institutional Investor as Corporate Monitor" 91 Columbia Law Review 1277–1368
BL Connelly, R Hoskisson, L Tihanyi & ST Certo, "Ownership as a Form of Corporate Governance"
Journal of Management Studies, Vol 47(8):1561-1589. PL Davies, "Institutional investors in the
United Kingdom" in T Baums et al., Institutional Investors and Corporate Governance ch 9
MN Firzli & V Bazi, "Infrastructure Investments in an Age of Austerity : The Pension and
Sovereign Funds Perspective", USAK/JTW 30 July 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" EBOLR 767 Books
A Chandler, The Visible Hand PL Davis et al., Institutional Investors
MC Jensen, Studies in the Theory of Capital Markets
GP Stapledon, Institutional Shareholders and Corporate Governance
External links Sovereign Wealth Fund Institute - Source for
Sovereign Wealth Funds Institutional Investor Magazine
Public Investor League Table - SWFI