What are the Types of Institutional Investors in Real Estate?
This article is part of our passive investors guide on real estate syndications, available here.
Institutional investments consist of a group of vast properties with typically high value, low and stabilized risk, and strategic location. But, who invests in these types of properties, and who can be classified as an institutional investor?
As it turns out, there are a few different kinds of institutional investors, each with its own agenda and interests. In this article, you’ll learn more about the different types of institutional investors, how they differ, and how to become one.
What is an Institutional Investor?
An institutional investor is a company or organization whose employees generally invest on behalf of other companies. They are known as “elephants” with a financial capacity capable of holding significant assets.
It’s also a legal entity that accumulates funds from different investors for use in various financial markets.
Some examples of these types of companies include:
- Pension funds
- Mutual funds
- Money managers
- Insurance companies
- Investment banks
- Business trusts
- Endowment funds
- Hedge funds
- Private equity investors
These institutional investors move large stocks and have power capable of influencing stock market movements.
Institutional investors have access to better rates and investments than ordinary individuals. As a result, they have better investment opportunities.
But how does this type of investor differ from a retail investor? Or is it the same thing? Let’s take a look.
What is a Retail Investor?
A retail investor, also called a non-professional investor, is an individual who buys and sells debt, as well as shares and other investments. They do so through a broker, a bank, or a mutual fund.
These investors work with a full-service traditional broker, a discount broker, and an online broker, who invest not for other entities but for personal benefit. This means that they use personal monetary assets but invest much smaller amounts of money less frequently.
These retailers are motivated by personal goals regarding managing their money and assets. These goals relate to lifestyle, events, and future planning such as retirement, saving for children’s education, buying real estate, or financing essential purchases.
Unlike institutional investors, the purchasing power is much lower, so higher commission rates and other operational changes can be noted, as well as behavioral biases. Still, a regulatory entity always intends to ensure that all these investors get solid financial guarantees.
Now that you know what a retail investor is and how it differs from institutional investors, let’s talk about the types of institutional investors.
So What are the Types of Institutional Investors?
Institutional investors include large companies with excellent purchasing power with great financial weight. Here are the different types of institutional investors:
- Pension funds: Pension fund companies take funds from their clients to invest them in different financial instruments, promising them future retirement benefits.
- Banks: Banks use customer money that comes in through savings, checking accounts, or fixed deposits, in various ways.
- Endowment funds: These funds usually reach the hands of non-profit organizations or charities. In this sense, the capital remains invested, and the non-profit organizations use the interest for their daily operations.
- Hedge funds: These funds represent a riskier approach to investing, so only large institutions have the potential to do so.
- Private equity investors: Capital that isn’t listed on a public stock exchange and consists of investor funds that invest in private companies.
- Insurance companies: Organizations that use their clients’ money as a premium, offering life, property, accident, and health insurance, among others.
- Commercial Trusts: Organizations where the money is in the hands of a person who uses it for the benefit of another person.
- Investment banks: Consist of transactions carried out by a financial entity under the name of individuals or organizations.
- Larger family offices: Manage the finances of high net-worth families who invest in different industries.
- Sovereign wealth funds: Function as a state-owned investment vehicle and control a national and international financial portfolio.
Let’s examine how one of these types of institutional investment works in an example.
Examples of Institutional Investors
Let’s look at the example of a pension fund that decides to privately invest a $5M check in real estate on behalf of its investors.
In this case, the pension fund is looking for an opportunity to find high-quality assets with growth potential that goes hand in hand with global economic and demographic trends. After analyzing the opportunity, each transaction’s possible risks and limits are studied. Institutional investors avoid risks at all costs when investing, so every detail is discussed, including all the possible future exits for the deal.
Through this real estate investment, an increase of the $5M initially put as initial capital is foreseen. With this increase in wealth, the pension fund’s capital also increases, allowing everyone who deposited their assets to obtain a percentage of that investment.
If the idea of earning a profit through this type of investing interests you, you might want to become an institutional investor yourself. Let’s take a look at how to do so.
How do you Become an Institutional Investor?
To become an institutional investor, you must be registered with the Securities and Exchange Commission and file initial and ongoing regulatory forms. Everything depends on the type of fund you decide to invest in.
For mutual and exchange-traded funds, for example, annual holdings must be reported multiple times. On the other hand, hedge funds must be informed about the value of a certain amount of managed dollars.
Additionally, an institutional investor needs to have a sufficient amount of capital to be denominated and must invest using financial instruments; otherwise, the investors cannot do so.
This capital is not necessarily from the institutions but from clients who deposit amounts of assets in a fund. The fund itself promotes and manages to generate profits.
Now that you know how to become an institutional investor let’s talk about what institutional investors typically purchase.
What are Institutional Investors Buying?
Institutional investors buy real estate, private capital, loans, and more. One example is Blackstone.
Blackstone is a global investment firm that invests capital on behalf of pension funds, large institutions, and individuals. Blackstone carefully manages the capital given to it, putting it to work in real estate and private equity, ensuring risk-adjusted growth in solid industries in various markets.
Among the things they purchase are:
- Real Estate
- Private Capital
- Hedge Fund Solutions
- Credit and Insurance
Frequently Asked Questions About Examples of Institutional Investors
No, an institutional investor is a large entity or institution that manages assets for large sums of money that are not necessarily their own but may belong to different people. However, an individual can be a retail investor who works with his capital and does so for personal purposes that will bring benefits according to his interests.
Institutional investors have different ways of making money and growing the capital they manage. For example, many funds or banks take advantage of the savings or constant income made by clients with high net worth by using it to make loans or investments.
BlackRock is the biggest institutional investor to date, managing capital on behalf of pension funds, institutions, and individuals.
The Types of Institutional Investors - Conclusion
Institutional investors make up an important investment market sector. They are commonly referred to as the “elephant” thanks to their tax capacity compared to other types of investors.
These institutions represent the trust that large companies, institutions, and individuals provide, leaving their capital and assets in their hands to make them grow and allow them to be managed depending on the interests and objectives of each group or person.
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- Blackstone, “What we do”
- The Motley Fool, “What Is an Institutional Investor?”
- CFI, “Institutional Investor”
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