Page 30 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

Institutional investors are private investment entities normally formed by groups of individuals
or companies. They handle large amounts of capital, allowing them to diversify their portfolios in
order to obtain attractive returns at a relatively moderate risk level. These organizations are banks,
pension funds, mutual funds, insurance companies, and investment companies.

Institutional investors are very important in financing infrastructure because they are focused on
long-term, low-risk, fixed-income investments that match the nature of their other investments
and instruments, typically sovereign insurance, pensions, liabilities, and large amounts of money
in securities and funds.

As institutional investors take less risk than other investors, their returns are also smaller. There is a
big “secondary” market for institutional investors within infrastructure projects. This usually works
by big investors providing financing during the construction stage, where the risks are much higher,
and then selling the debt to institutional investors during the operational phase of the project,
where the risks (and returns) are lower. There has been a steady increase in the involvement of
institutional investors in infrastructure projects.

Box 7: Investor involvement in types of infrastructure projects

Institutional investor targets in infrastructure
Infrastructure Private equity Fixed income Equity

Brownfield projects
Public and
Equity funds (not listed) Debt funds listed
Direct equity Greenfield in developing Project and corporate infrastructure
economies bonds companies

Non-institutional or “retail” investors are usually private or individual investors and privately-
owned companies. Non-institutional investors can be any legal person gradually creating their
own investment portfolio through small to medium-sized investments, usually similar in size and
market reach. Each private investor has their own preferred kind of investments or type of project
(e.g. residential, industrial, infrastructure, commercial, public, private, to-sell, or to-rent). Each also
has their own level of risk tolerance.

Non-institutional investors invest for themselves, and manage their own capital. They often pay
higher processing fees on their trades, as well as marketing, commission, and other related
fees because of their relatively small purchasing power. They are also afforded certain legal
protections, and are barred from making certain risky, complex investments because they are
considered “unsophisticated” investors. In urban development, these investors are mainly real
estate development companies and companies related to construction activities which are driven

12 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects