What are Institutional Investors?

by | Mar 27, 2017 | Investment Tips

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Institutional investors are part of the rich network of investors who use CODE’s SME marketplace. We explain what an institutional investor is.

Institutional investors such as banks, insurance groups, pensions & family offices
What is an Institutional Investor?

An institutional investor is an organisation that invests on behalf of its members. The “institution” does all the research legwork in terms of finding businesses or investment platforms in which to invest members’ funds.  Examples include commercial banks, pension funds and life insurance companies.

Institutional investors have the knowledge and resources to research a wider variety of investment options which are not open to retail investors.  Their investments are generally on a much larger scale because of their size and the amount of funds within their control. They are the largest force behind securities market trades and for that reason can greatly affect the prices of securities.

Types of Institutional Investors:
  • Investment Firms: Hedge funds, investment banks
  • Insurance companies: Life, medical, travel insurance etc
  • Savings Institutions: Pension funds, ISAs, banks
  • Foundations: Family trusts or companies dedicated to a specific public purpose

As larger entities with greater access to companies and an assumed larger pool of expertise, institutional investors are generally thought to be better at investing. Of course, being bigger means they ‘ll probably have larger sums that can be invested into larger investment opportunities.

The reverse of this is that the returns on those investments may not be as high as they could be for opportunities that may be higher risk.

What do institutional investors invest in?

Traditionally Institutional Investors tended not to invest in small to medium businesses, sticking to larger scale trades. Usually investments are split across a variety of asset classes with the standard allocation being approx. 40% of assets to equity, 40% to fixed income, and 20% allocated to real estate.

However, the growth of alternative finance and higher returns of marketplace lending to SMEs, means things are beginning to change. Institutional investors are now eager to get involved in investments that were previously the domain of private investors, and which could result in healthy profits for their members.

Alternative finance marketplaces like CODE Investing make this much more practical as we source, vet and rate each business opportunity. By proffering qualified, high growth businesses seeking loans of £1m plus, institutional investors can diversify their assets across a much broader playing field without the extra legwork.

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