Are Institutional Investors Fueling Stock Market Liquidity?

(September 20, 2012) — Institutional participation in the US stock market in recent decades may be playing a growing role in overall stock market liquidity, according to an academic report.

The study found that in recent years, institutions, and particularly hedge funds, have increased their holdings of smaller stocks and decreased their holdings of larger stocks. “Institutions currently underweight the largest stocks and overweight the smallest stocks relative to market weights,” professors Marshall Blume and Donald Keim of the University of Pennsylvania write.

Dimensional Fund Advisors, an investment firm with institutional clients, pioneered investing in smaller-cap stocks for the long-term, but now, they’re not alone, Keim told aiCIO. “There’s a strong correlation between the degree of investment in the stock market and overall market liquidity, especially for smaller stocks,” he added. “Institutional involvement in the market is highly related to the liquidity of individual securities.”

The reason? Keim emphasized that the paper does not mean to explain the relationship between higher institutional investment in small-cap equities and market liquidity, yet he theorized that the reason for the higher liquidity could be due to greater trading of stocks and increased market competition. “The paper confirms intuition — markets are becoming more liquid and that coincides with an increase in institutional presence. The cost of buying and selling securities has lowered — that’s a good thing for investors.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The gist of the study: the number of institutions that own and trade a stock is more important than the percentage of institutional ownership in explaining higher liquidity. In addition, the report asserted: “The proportion of equities managed by institutional investors hovered around 5% from 1900 to 1945. But after World War II, institutional ownership started to increase, reaching 67% by the end of 2010. Keim added that this trend toward decreased allocations to the largest stocks and increased allocations to the smallest stocks, while applying to institutional investors of all sizes, has been most pronounced for the smallest 25 % of institutions.

Read the full paper here.

CVC Capital Partners, one of the biggest private equity firms in the world, is selling a 10% stake to three sovereign wealth funds, Reuters has reported.

(September 20, 2012) — UK-based private equity firm CVC Capital Partners has sold a 10% stake of the firm to a group of powerful, private investors, including the Kuwait Investment Authority (KIA), the Government Investment Corporation of Singapore (GIC), and an unnamed Asian fund.

CVC Capital — which manages capital on behalf of around 300 institutional, governmental and private investors worldwide — was formerly the private-equity business for Citicorp, now Citigroup Inc. It bought about 63% of Formula One in 2005 and 2006. In May and June, the private equity firm sold a $2.1 billion stake to Waddell & Reed Financial, BlackRock, and Norges Bank Investment Management. These deals valued the auto-racing company at $9.1 billion, according to Bloomberg.

CVC’s move to sell a chunk of its parent company to a group of private investors follows similar actions by rival Apax Partners. In February 2010, buyout firm Apax Partners sold off a 10% stake to investors including the China Investment Corporation, China’s sovereign wealth fund.

Leading private equity firms are increasingly seeking to deepen relationships with their largest investors to ensure their survival. In June, for example, Kohlberg Kravis Roberts & Co. won a $225 million commitment from the Oregon Investment Council for the investment firm’s buyout fund investing in Asia.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

KKR manages a total of nearly $3 billion, or 6%, of Oregon’s roughly $58 billion in pension fund investments. The council, which manages assets for the Oregon Public Employees Retirement Fund and Oregon’s Common School Fund, revealed at the time that it was committing $6 billion for KKR Asian Fund II LP to invest across Asia. Oregon’s pension was an investor in the first Asia fund operated by KKR, which has posted net returns of 19% in the last roughly three decades.

You’re out of free articles!!

Don’t leave before subscribing!