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THE ECONOMICS OF THE PRIVATE MARKET

Other Investors

Other investors in private bonds include mutual funds, foreign banks, endowment funds, and some very wealthy individuals, but the combined market share of these participants is quite small. Mutual funds are restricted to holding no more than 15 percent of their assets in the form of illiquid securities. An exception exists for private placements purchased pursuant to Rule 144A. For such securities, the mutual funds' boards of directors may classify the securities as liquid if they determine that the securities are generally as liquid as comparable publicly traded bonds. ⁷³  Mutual funds have recently increased their investments in private placements, especially underwritten Rule 144A securities, so current restrictions may in the future be constraints. In the mid-1980s, Japanese banks aggressively bought private bonds, but since then they have disappeared from the market.

73. Rule 144A securities are described in detail in part 2, section 1. After life insurance companies, mutual funds have been the largest buyers of 144A private bonds. According to the SEC staff report on Rule 144A (September 1991), insurance companies bought just over two-thirds of the private bonds issued under Rule 144A in the eighteen months following the rule's adoption, mutual funds bought 15 percent, pension funds bought 5 percent, and banks and thrifts bought 4 percent. More recently the share held by mutual funds has increased.

Summary

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