'Instos' range in size from large Investment banks/wealth managers to small-medium sized broking houses. At its core an insto will be tasked with a mandate, which is much like a business plan. It defines the path and parameters in order to achieve a successful investment. One insto's investment mandate may be "total return as measured by 10bps over the benchmark index". Another may be "10% rate of return over 4 years via biotech sector only". The investment mandate is governed by the insto's managers but more importantly, what their clients demand. This is obviously oversimplifying it, but as a first step this is how objectives are set.
Smaller-shops like Pattersons, Bell Potter etc are less rigid. Their mandate might be as simple as "positive return", so that when a company comes to them for funding the first demand they put on the company is an issue price below the current price. They do this to ensure positive return for their clients - remember the funding is ultimately coming from that clients bank account, not from the instos proprietary account.
Specialist instos like investment funds (Fidelity, Maple Brown Abbot, Perpetual) will have people that are 'special'. These people can run companies and make decisions but also understand and implement business models/plans. A mandate will exist but it wont determine how they manage an investment when a company comes to them for money. They will generally want a large or controlling stake so that they can influence the business - this may mean pushing the company to return capital in the form of dividends or selling non-core assets of the company to then return money to shareholders. It all rolls up to "total return". A good insto or cornerstone investor/s will support the business to grow. Its a transference of risk; I have money to give to someone else who is better positioned to invest it. Eg: Canaccord make provide funding to NEN as NEN has the expertise but also the assets that would otherwise be impossible to replicate if Canaccord were to go it alone.
When the business ceases to grow (due to saturation, i.e too big to grow at the same rates) or market dynamics are against the business an insto might exit their position. This is why 'Mum and Dad' investors don't like to see insto's reduce holdings as it indicates possible 'issues'. As you can see there is no one answer to your question. Each insto will have its own internal agenda (mandate), and what is return for one might not be return for another. But generally they are trying to achieve a selling price that is much higher than buying/entry price.
Many years ago I worked for a broker named Nova Pacific securities. We bought the rights to use the E*TRADE name, despite having our own technology/broking platform (including web front end). We used the corporateid and 'style' guide as part of the deal but it was our own tech. We issued shares to E*TRADE America for the rights to this. They became major shareholders when we floated the business. Another investment group - Caledonia - came along and participated in a capital raising we did to grow the business. They continued to support us for many years. Their average buy price was around $0.80. I almost cant remember now, but around ~2007 ANZ Bank bought us for $4.50 and Caledonia sold into the offer for the business for a substantial profit. I'd say this was a successful outcome for them. Off topic, but ANZ have ruined that business - all the originals are gone, but we still catch-up now and again. This kind of story is repeatable, it doesn't matter what sector O&G, retailing, materials etc.
This is how instos can make money.
NEN Price at posting:
41.0¢ Sentiment: Buy Disclosure: Held
