are organizations which pool large sums of money and invest those sums in companies. They include banks
, insurance companies
, retirement or pension funds
, hedge funds
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 engage in active role 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
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.
Institutional investor types
In various countries different types institutional investors may be more important. In oil-exporting countries sovereign wealth funds
are very important, while in developed economies pension funds
may be more important.
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:
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.
The major investor associations are:
The IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association are also represented by the Institutional Shareholder Committee.