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Home > Financing Best Practice > The Role of Institutional Investors in Corporate Financing

Financing Best Practice

The Role of Institutional Investors in Corporate Financing

by Hao Jiang

Executive Summary

Introduction

Institutional investors have become increasingly important in global capital markets. As of the end of December 2007, total assets under management by major global institutional investors reached US$81.90 trillion. In particular, mutual funds, pension funds, and insurance companies managed US$26.2, 28.2, and 19.9 trillion of assets, respectively, while assets managed by nontraditional managers such as hedge funds, sovereign funds, and private equity funds experienced dramatic growth, reaching US$2.3, 3.3, and 2.0 trillion in 2007 (Figure 1). In comparison, the world equity markets amounted to US$60.8 trillion, and the aggregate value of corporate bonds outstanding in the United States, the largest corporate bond market, was US$5.8 trillion in 2007. Clearly, for any successful corporate managers who raise capital to finance their future growth, it is crucial to understand such institutionalization in the global fund markets.

Major Institutional Players

Institutional investors are a heterogeneous group of investors that populate the global capital markets. Based on their legal type, institutional investors can be broadly classified into mutual funds, pension funds, insurance companies, sovereign funds, hedge funds, and private equity funds.

A mutual fund is an investment vehicle that buys a portfolio of securities selected by a professional investment adviser to meet a specified financial goal (investment objective). Between 2000 and 2007, the total net assets of mutual funds grew from US$6.96 to 12.02 trillion in the United States, from US$3.29 to 8.98 trillion in Europe, from US$1.13 to 3.67 trillion in Asia-Pacific, and from US$16.92 to 95.22 billion in Africa (Figure 2).

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. Table 1 lists the world’s 20 largest pension funds as ranked by Pensions & Investments. Insurance companies and banks are also important types of institutional investor that constitute the traditional asset managers.

Table 1. The world’s top 20 pension funds based on total assets. (Source: Pensions & Investments; Watson Wyatt, 2006)

Rank Fund Country Assets (US$ million)
1 Government Pension Investment Japan 870,587
2 Government Pension Norway 235,849
3 ABP Netherlands 226,974
4 National Pension Korea 214,184
5 California Public Employees US 195,978
6 Pension Fund Association Japan 183,352
7 Federal Retirement Thrift US 167,165
8 Local Government Officials Japan 137,153
9 California State Teachers US 133,988
10 New York State Common US 131,861
11 GEPF South Africa 124,167
12 Postal Savings Fund Taiwan 117,265
13 Florida State Board US 114,935
14 General Motors US 114,271
15 New York City Retirement US 105,860
16 Ontario Teachers Canada 99,490
17 Texas Teachers US 94,384
18 New York State Teachers US 87,353
19 Public Schools Employees Japan 85,224
20 PGGM Netherlands 84,986

Paralleling the growth of traditional institutions is the universe of nontraditional institutional investors. Among them, a sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets. Table 2 shows the top sovereign wealth funds across the world.

Table 2. The world’s largest sovereign wealth funds. (Ranking by Sovereign Wealth Fund Institute, 2008)

Country Fund Assets (US$ billion) Inception Origin
UAE: Abu Dhabi Abu Dhabi Investment Authority 875 1976 Oil
Saudi Arabia SAMA Foreign Holdings 433.0 n/a Oil
Singapore Government of Singapore Investment Corporation 330 1981 Noncommodity
China SAFE Investment Company 311.6 Noncommodity
Norway Government Pension Fund—Global 301 1990 Oil
Kuwait Kuwait Investment Authority 264.4 1953 Oil
China China Investment Corporation 200 2007 Noncommodity
Russia National Welfare Fund 189.7 2008 Oil
China: Hong Kong Hong Kong Monetary Authority Investment Portfolio 173 1998 Noncommodity
Singapore Temasek Holdings 134 1974 Noncommodity
UAE: Dubai Investment Corporation of Dubai 82 2006 Oil
China National Social Security Fund 74 2000 Noncommodity
Qatar Qatar Investment Authority 60 2003 Oil
Libya Libyan Investment Authority 50 2006 Oil
Algeria Revenue Regulation Fund 47 2000 Oil
Australia Australian Future Fund 43.8 2004 Noncommodity
US: Alaska Alaska Permanent Fund 39.8 1976 Oil
Kazakhstan Kazakhstan National Fund 38 2000 Oil
Ireland National Pensions Reserve Fund 30.8 2001 Noncommodity
South Korea Korea Investment Corporation 30 2005 Noncommodity
Brunei Brunei Investment Agency 30 1983 Oil

A hedge fund is an unregulated pool of money managed by an investment advisor, the hedge fund manager, who typically has the right to have short positions, to borrow, and to make extensive use of derivatives. Hedge fund managers receive both fixed and performance fees. Table 3 shows the top ten hedge funds based on assets under management ranked by Institutional Investor in 2007.

Table 3. The world’s top ten hedge funds. (Ranking by Institutional Investor, 2007)

Rank Fund Location Firm capital (US$ million)
1 2 3 4 5 6 7 8 9 10 JP Morgan Asset Management Bridgewater Associates Farallon Capital Management Renaissance Technologies Corp. Och-Ziff Capital Management Group DE Shaw Group Goldman Sachs Asset Management Paulson & Co Barclays Global Investors GLG Partners New York, NY Westport, CT San Francisco, CA East Setauket, NY New York, NY New York, NY New York, NY New York, NY London, UK London, UK 44,700 36,000 36,000 33,300 33,200 32,240 29,206 28,979 26,227 23,900

A private equity fund is a pooled investment vehicle which invests its money in equity securities of companies that have not “gone public” (i.e. are not listed on a public exchange). Private equity funds are typically limited partnerships with a fixed term of ten years (often with annual extensions). At inception, institutional investors such as pension funds and endowments (limited partners) commit a certain amount of capital to private equity funds, which are run by the general partners. Table 4 is a list of the ten largest private equity firms in the world as ranked by Private Equity International in 2008.

Table 4. The world’s ten largest private equity firms. (Ranking by Private Equity International, 2008)

Rank Firm Headquarters Capital raised 2003–2008 (US$ billion)
1 2 3 4 5 6 7 8 9 10 The Carlyle Group Goldman Sachs Principal Investment Area Texas Pacific Group Kohlberg Kravis Roberts CVC Capital Partners Apollo Management Bain Capital Permira Apax Partners The Blackstone Group Washington, DC New York, NY Fort Worth, TX New York, NY London, UK New York, NY Boston, MA London, UK London, UK New York, NY 52 49.05 48.75 39.67 36.84 32.82 31.71 25.43 25.23 23.3

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Further reading

Books:

  • Davis, E. Philip, and Benn Steil. Institutional Investors. Cambridge, MA: MIT Press, 2004.
  • Jaeger, Robert A. All About Hedge Funds: The Easy Way to Get Started. New York: McGraw-Hill, 2003.
  • Pozen, Robert C. The Mutual Fund Business. 2nd ed. Boston, MA: Houghton Mifflin, 2002.
  • Pratt’s Guide to Private Equity & Venture Capital Sources. New York: Thomson Reuters, 2008.

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