Pushing for diversity and inclusion in the workplace and throughout society isn't only a product of the racial inequality protests of 2020.
A movement has been building in recent years to get big pensions and other asset owners to use their financial clout to drive change through the $70 trillion asset-management industry.
Angela Matheny, an investment management consultant, started working in 2016 on Colonial Consulting's effort to raise the profile of firms run by people of color with above-average returns, warning that pensions and other big asset allocators risk missing out on the strength of diverse investors. And as she's quick to point out, the rationale is simultaneously about social justice and fiduciary duty.
"If you want to drive change, you're going to need more people in the room that look like me," said Matheny, who is Black. "People who are willing to tackle unconscious bias, who aren't afraid to talk about the elephant in the room."
Matheny leads her firm's diverse manager initiative, which advises clients on investing with private equity and other asset management funds that are owned or substantially run by women and people of color.
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"It is our goal to build better portfolios, which will naturally lead to more racial equity and equal opportunity," she said.
Today, roughly 10% of the $37 billion in assets overseen by Colonial has been invested with diverse managers, Matheny said, compared with about $313 million in 2013. The New York firm launched the effort that year after a client challenged its chief investment officer over why it didn't have more diversity among its asset managers.
A growing chorus of critics and activists has been asking that very question—even before the racial justice protest movement of 2020—as part of a campaign to raise awareness and change the culture of the asset management industry by putting pressure on endowments, pension funds and other limited partners that wield transformational clout.
In a profession still dominated by white male investors, many women and people of color are now well-established general partners, but they tend to remain on the margins.
Private equity and venture capital funds led by people from underrepresented ethnic and racial backgrounds have performed as well as their industry peers, with some studies showing they have better-than-average returns. But they managed just over 1% of the capital across the industry as of 2019, according to the latest Knight Foundation study of diverse investment practices.
Diverse-owned PE and VC firms' AUM
That low rate of participation isn't for lack of available talent. Across the private equity and venture capital industries combined, women-owned and minority-owned firms (252 in total) represented 5.2% and 3.8%, respectively, of the industry total, according to Knight Foundation data.
Advocates and scholars who have been working on the issue say the opportunity gap for underrepresented managers is mainly a result of unconscious bias and a failure to intentionally seek out investors outside of asset owners' existing, mostly white networks.
The drive for change has picked up momentum in the past couple of years, from the private sector to Congress. Robert Raben, a former Justice Department official who now runs a public affairs firm, launched an initiative to bring more transparency to how public and private asset owners select outside management firms. Even the Rev. Al Sharpton has taken up the cause, calling attention to practices at the endowments of Ivy League colleges and other elite universities.
Earlier this year, Reps. Emanuel Cleaver (D-Mo.) and Joseph P. Kennedy III (D-Mass.) confronted the nation's 25 largest university endowments seeking to learn how much they work with diverse managers. And the challenge of getting high-quality data across the industry is emerging as a crucial area of focus for advocates and academics who are working to illuminate the issue.
Several schools have yet to respond to the congressmen's request. Harvard University did, however, disclosing that 27% of the external firms that oversee its nearly $41 billion portfolio are majority-owned by women or people of color. That amounts to roughly one-quarter of the Harvard Management Co.'s assets.
To some extent, these types of efforts are meant to shame major asset owners into acknowledging the lack of diversity in their networks, highlighting the potential they have as limited partners to bring about change.
Even with this year's renewed focus on racial inequality, few LPs are using their power to demand better representation among general partners or other managers, according to investors.
"If they chose to act uniformly and deliberately, LPs could have a very dramatic impact on change in a very short period of time," said Robert Greene, a former pension board chairman and current CEO of the National Association of Investment Companies, a trade group for diverse managers.
Finding transparency about diversity is limited in the historically opaque private markets. Harvard professor Josh Lerner, the author of the Knight studies, pointed out that tallying the PE and venture fund ownership proved especially difficult to measure. He said many asset allocators withhold information that would highlight their lack of working with firms led by people of color. And at least some diverse managers are reluctant to gain a higher profile. "You can't manage what you can't measure, and that certainly seems to hold true in this arena as well," Lerner said.
He has called for an open-source database that could help LPs that want to seek out diverse managers. Much of that information is closely held among private networks.
"But it doesn't really solve the problem of the fact that you have institutions interested in increasing their allocations to minority managers and not necessarily having very full information about who's out there, or where to start looking," Lerner said.
Among the hurdles in gathering data is a variety of definitions for diversity or certain racial groups, along with the fact that researchers often depend on participants to self-report their firm's data.
PitchBook, which specializes in data and tools for researching the private markets, began studying how to solve delicate methodology questions on race and ethnicity earlier this summer. The company is evaluating a change to the platform that would use self-reported information about founders' racial identity, said Peter Escher, PitchBook's vice president of research.
A few years ago, PitchBook started an initiative on tracking gender, making the company a leader on data about female founders in the venture capital ecosystem. That created something of a model for the challenge of collecting racial data, Escher said. By contrast, the data on gender relies on PitchBook's own conclusions based on other information, such as people's names or photos of them.
"What's fairly obvious to me is that we can't as a data provider create a methodology that puts people into categories where they don't see themselves," he said. "And so that creates not a challenge but an opportunity to go out and engage directly."