Making investments is a real art, and you need to be the next Leonardo Da Vinci to succeed. Yet, this is only true for retail investors. Institutional ones don’t have that big headache as they entrust their funds to professional traders. Both methods have particular pros and cons and may bring substantial income.
Whether you are an investor looking for new strategies or you want to raise funds for your project, you need to consider all the options. Today, we’ll dwell upon institutional investments and various types of such market players.
Institutional VS Retail investors
So what’s the difference between a retail investor and an institutional one?
A retail investor (aka individual investor) is a single person, usually not a professional, who buys and sells assets for their personal funds. In most cases, individual investors can only purchase small amounts of securities. For this reason, they need to pay a higher fee comparing to bigger market players.
An institutional investor is a group of people or an organization that trades assets in large share quantities. Due to this, they get preferential treatment and pay lower fees. Such big players are usually much more experienced and knowledgeable than retail investors, they have professional analytics and traders in their team, which helps them to make the most out of the bargain.
The importance of institutional investors
If you are considering taking part in institutional investment, you may join one of the organizations that we’ll talk about a bit later. What will it grant you?
First of all, institutional investors often provide not only money but also advice, networking, and other assistance (smart money) to the companies raising funds. Besides, they allow retail investors to invest in capital markets — thus getting better returns than the bank deposit would grant them — without need to gain expertise in financial markets and with reduced risk exposure. This means not only better opportunities to save money but also much higher chances of the income since the money managed by fund experts is working better.
If you look for new opportunities in fundraising, you should also take a closer look at institutional investors. There are several reasons for that. First, they may invest at an early stage of the project development if they see enough prospects and opportunities. Second, they always buy more assets than an ordinary retail investor. This way, one investor may even cover the soft cap of the project. Third, you don’t need to gain the trust of all the investors one by one as you communicate with the representatives of the whole organization.
Types of institutional investors
Depending on the type of the organization, investing practices may vary significantly. Institutional investors choose whom they invest in, how much control they take, the risk tolerance, and, of course, the participants of these funds.
- Venture Capitals (VC) mostly invest in small private companies with a very high growth potential and failure rate. The suppliers of VC usually take part in the management of the company, which shares they purchased.
- Hedge Funds mostly invest in liquid assets on behalf of their participants. Most of them are limited partnerships with a fund manager as a General Partner and investors as Limited Partners. Hedge Funds take long and short position or a hedge position in securities to mitigate risk. Besides, they have unlimited leverage.
- Mutual Funds operate the money pooled in by the participants. The managers running such a fund invest in liquid assets charging fund members for their services. The important feature of such organizations is that they mostly provide users with particular protection from security underperformance.
- Private Equity (PE) Funds are mostly Limited partnerships with a fixed term of participation. They mostly invest in already operational companies, often big, that don’t offer 50x returns. Yet, such a strategy ensures quite a low-risk tolerance, comparing to VC.
- Endowment Funds are organized by universities, hospitals, and charity organizations, which is why they are usually transformed into non-profit organizations.
- Insurance Companies regularly collect premiums, which have to be deployed somehow. For this reason, they also invest in securities.
- Pension Funds are extremely low risk-tolerant and invest only in publicly listed stocks and bonds.
Challenges of institutional investors
However tempting it may seem to work with institutional investors, there are some clear challenges to be faced.
If you want to attract an institutional investor, you should understand that it will be much harder to gain their trust as bigger funds are at stake. You need to demonstrate a satisfactory risk/returns profile to get their attention. Besides, most of the organizations participate in your company management as they have shares of this business. That’s why another challenge is reducing the amount of control over the company or the equity stake given away to them.
Conclusion
As trading is an art, institutional investors are definitely the next Leonardo Da Vinci in this sphere. Don’t neglect such a possibility when considering your next projects for investment or looking for new fundraising options. But don’t forget to be careful and choose wisely the type of investor that suits you best.
