Whether you are learning about personal investing or seeking investment dollars for your company, you should know the difference between private and institutional investors. Institutional investors are typically banks, pension funds, insurance companies, and hedge and mutual funds. Private investors include individuals, venture capital companies, and, sometimes family and friends. If you have a start-up company, you'll probably have to depend on private investors for money.
When investors, particularly financial institutions, pension funds, universities and insurance companies, pool funds to invest millions on a variety of assets, they become institutional investors. Because of their large dollars, institutional investors typically invest in large projects and companies. In most cases, they seek secure investments that return modest or guaranteed earnings, with a maximum of safety. Private investors exercise more freedom in selecting investment options, willing to invest in smaller companies and start-ups.
From the individual that buys stocks, mutual funds or real estate to generate investment returns to venture capitalists making risky investments in young companies, private investors design their own investment plans. They are willing to take on higher risk than institutional investors. Private investors are prime sources of small business capital. Institutional investors typically have little interest in small business because of the higher risk, regardless of the potential high rewards.
Institutional investors usually are attracted to large companies and investments. Since they often have pooled funds from a variety of companies, they tend to have large dollars. It's easier to administer fewer, but larger, investments than more numerous smaller projects. Private investors, including so-called angel investors, are the most important source of capital for new or smaller businesses. There is a major exception to this tendency. The Small Business Administration, an institutional investor, focuses on small and start-up businesses only.
Lending Vs Investment
Some institutional investors, particularly banks, often prefer to lend money instead of making pure investments. Whether offering loans or lines of credit, these institutional investors seek out established, low risk organizations. Private investors, particularly venture capitalists, seldom offer loans, preferring to use their dollars to receive an ownership share in companies. Unlike some angel investors, who may have altruistic goals, most private investors, like venture capital firms, simply want to make money.
Both private and institutional investors strongly influence the financial strength of an economy. As institutional investors minimize risk, they are active buyers of secure, but modest return, blue chip proven investments. Private investors welcome higher risk, with hopes of higher rewards, earnings, than institutional investors. Private investors may select non-public or public companies as investment targets, while institutional investors prefer publicly-traded companies and municipalities for their money decisions.