More than ‘window dressing' is needed on GP diversity

Asset owners are increasingly putting their weight behind efforts by their current or future general partners to diversify their investment executive ranks.

"There has been real change in the last 18 to 24 months, with most asset owners asking venture capital firm executives direct questions at board meetings about diversity and inclusion," said Ethan Samson, Portland, Ore.-based managing principal and private markets consultant at Meketa Investment Group. "(Asset owners) are really wanting to see managers have good answers rather than window dressing."

Asset owners see promoting diversity, equity and inclusion at money management firms as a necessary ingredient in improving investment returns. A more diverse investment management team could uncover investment nuggets overlooked by less diverse teams, industry executives say.

Forty-one percent of venture capital firms responding to a National Venture Capital Association and Deloitte survey said their limited partners requested details about their firms' diversity, equity and inclusion in the past 12 months, compared with 36% in 2018, according to survey results released in March.

While it is too early to measure the impact of these inquiries on venture capital firms, Mr. Samson said he is seeing some signs of change.

"We see them (venture capital firms) make hires that are diverse...directly correlated to questions asked by LPs why their fund is structured a certain way," Mr. Samson said.

Even clients that do not have a diverse manager program are asking harder questions, he said. "There's been an excuse for a long time that it is hard to hire senior people that are diverse," Mr. Samson said. "That excuse is not working anymore."

The protests and the Black Lives Matter movement of 2020 accelerated the adoption by some asset owners of diversity, equity and inclusion as "not just a question in due diligence but one of the more important questions in diligence," he said.

What's more, there is increasing evidence of a "diversity premium" in that diverse teams can produce higher returns than less diverse ones, Mr. Samson said. Valuations are so high that looking for deals with a "diverse lens" presents an opportunity to invest in overlooked assets, he said.

There are many venture capital firms owned by women and minorities that are outside the typical list of brand-name venture capital firms "that are performing and producing great returns," said Brandon Zeigler, a director on the impact investment team at OCIO firm Global Endowment Management, Charlotte, N.C. "Do you want to dig deeper, go outside the usual network and find groups that are doing meaningful work?"

Over the past three years, GEM has increased its investment with managers led by diverse teams tenfold across asset classes, by making changes to how and where the firm seeks new talented managers, he said.

"Our networks are more inclusive," he said.

GEM also has been building relationships with other LPs to exchange information on finding diverse-owned managers, tips and lessons learned, and pushing for change, Mr. Zeigler said.

GEM has $12 billion in assets under management.