Without doubt, globalisation has led to an unprecedented expansion of international financial flows and intermediation as well as of the size and turnover of financial markets, both in terms and in relation to GDP. Between 1990 and 2003, external assets of industrial countries rose from $9.7 trillion to $36 trillion, i.e., is from 75 to over 200 per cent of GDP.
External assets of emerging developing countries rose from $336 billion to $1849 billion, that is, from 30% to 70% of GDP. Similar trends are noted in the volume of foreign liabilities for both types of countries. In the period between 1990 and 2005 capitalisation of stock exchanges in the G7 countries rose from 59 to 96% of the area’s GDP, after a peak of 141% in 2000.
The nominal value of exchange traded derivatives rose between 1990 and 2005 from $2.3 trillion to $58 trillion, i.e., from 16 to 214% of the group’s GDP. At the beginning of 21st century, the daily turnover in the major financial markets ranged from $0.2 trillion for equity markets (excluding derivatives) to $2.4 trillion for exchange-traded derivatives.
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Institutional investors, hedge funds and private equity firms are playing a crucial role in the global financial markets. According to the IMF at the end of 2005 non-bank institutional investors (insurance companies, pension funds and mutual funds) in industrial countries had total assets under management amounted to $46 trillion, 132% of the area’s GDP; compared with 1995, the rate of increase was in the order of 100% in the US, and in Germany, 240% in the UK and in France; much smaller in Japan.
Some of these institutional investors are individually very big: the largest US bond mutual funds’ manager, Pacific Investment Management Company had $668 billion in fixed-income investments at the end of 2006; the largest US pension fund, the California Public Employees Retirement System had an investment portfolio valued at $241.7 billion at the end of March 2007.
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Hedge funds are among the newest categories of intermediaries to have acquired an important role on the global stage. At the end of September 2006, there were about 9000 hedge funds world-wide, with total assets under their management of approximately $1.34 trillion.
Hedge funds are not subject to the disclosure and regulatory requirements that apply to banks, security houses or institutional investors. Commercial banks, security houses and investment banks have created their own hedge fund (and also private equity firms) to broaden the range of financial services to their customers.
Currently there are 2700 private equity firm world-wide and their private equity buy out amounted to $440 billion in the US and Europe, up from about $70 billion in 2000. During 2006 ten largest PE firms raised $8 to $16 billion each. “The Carlyle Group has influential political connections in the United States and in other major countries.”
A very large number of players and participants play their roles in the financial market. These can be grouped as individuals (who save), corporate (the net borrowers), government (to take care of the budget deficit or as a measure of controlling the liquidity, etc.), the regulators (to manage, supervise and control flow of funds – In India, two basic agencies regulating the financial market are the Reserve Bank of India (RBI ) for liquidity and Securities and Exchange Board of India for regulating and supervising the capital market); and the market intermediaries known as financial intermediaries [or merchant bankers (operating in financial system), also known as investment managers or investment bankers.
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The objective of these intermediaries is to facilitate the process of investment and to establish a link between the investors and the users of funds. Corporations and Governments do not market their securities directly to the investors. Rather they hire the services of the market intermediaries to represent them to the investors.
Investors, particularly small investors, find it difficult to make direct investment.] Some of the market intermediaries (also known as financial intermediaries) are: Lead Managers, Bankers to the Issue, Registrar and Share Transfer Agents, Depositories, Clearing Corporations, Share brokers, Credit Rating Agencies, Underwriters, Custodians, Portfolio Managers, Mutual Funds, and Investment Companies (including mutual funds, hedge funds, pension funds, insurance companies and finance companies, venture capitalists, private equity companies).
These market intermediaries provide different types of financial services to the investors. They provide expertise to the securities issuers. They are constantly operating in the financial market. Small Investors in particular and other investors too, rely on them.
It is in their (market intermediaries) own interest to behave rationally, maintain integrity and to protect and maintain reputation, otherwise the investors would not trust them next time. In principle, these intermediaries bring efficiency to corporate fund raising by developing expertise in pricing new issues and marketing them to the investors.
Now we would like to discuss the important players in corporate financing in international business field.