Executive Summary
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Institutional investors have become increasingly important in global capital markets.
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In equity markets, institutional investors tend to prefer liquid stocks with larger market capitalization, higher turnover, and higher price levels.
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Institutional investors particularly favor stocks in popular equity indexes, giving them higher valuations because their performance is typically benchmarked against those indexes.
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In bond markets that are mainly populated by institutional investors, there is a clear clientele effect.
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Private equity funds are an important source of capital for entrepreneurial firms.
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.
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