Minority- and Women-Owned Private Equity Firms Outstrip Benchmarks

NAIC report says more institutional investors should consider allocations to diverse managers

Some of the largest institutional investors in the U.S. have increased their allocations to private equity firms owned by women and minorities in recognition of their superior performance, the National Association of Investment Companies reported Wednesday.

However, the total invested with diverse (also called “emerging”) managers remains a disproportionately small amount of the whole, according to the report.

The report, written by Meredith Jones of AON Hewitt and compiled with assistance from KPMG LLC, found that diverse-owned firms generated a net-of-fee internal rate of return of 16.15% for the 10-year reporting period ended December 2015, compared with a 11.3% IRR for the Cambridge US Buyout benchmark for the same period.

Jones is the author of "Women of the Street: Why Female Money Managers Generate Higher Returns (And How You Can Too)."

“It is widely accepted in investing that diversification is a good thing,” writes Jones in the book. “We diversify across managers, sectors, geographies, stock and bonds, and time frames, among other things. Wouldn’t it make sense to diversify behaviors and hormonal profiles as well?”

Funds included in the NAIC Diverse Private Equity Index outperformed the median Cambridge U.S. Private Equity funds during most vintage years.

On an IRR and multiple-on-invested-capital basis, diverse funds outperformed 62.5% of the time. And on a distributed-to-paid-in-capital basis, diverse funds outperformed 56.3% of the time.

Over longer time horizons, diverse private equity funds included in the NAIC index consistently outperformed both median and upper-quartile funds in the Cambridge U.S. Private Equity and the Cambridge U.S. Buyout cohorts.

The NAIC report said the findings confirmed and updated those in a similar study conducted in 2012.

Both studies concluded that superior performance had led to increased capital flowing into diverse-owned firms, led by New York Common, Texas Teachers Retirement System, Texas Employees Retirement System, New York Teachers Retirement System, CalPERS, CalSTRS, Verizon, Exelon Corporation and the Virginia Retirement System.

But although these and other investors have recognized the talent within the diverse manager space and have become proponents for these managers, the total invested with them in many cases represents 10% or less of an investor's total investable assets, according to the report.

It said an easy step that many investors could take is to ensure that one or more diverse private equity firms are always included in manager searches and requests for proposals. An inclusion rule should increase the chances that highly qualified diverse asset managers will be seen and evaluated with their peers.

The NAIC pointed to a growing body of research showing the benefits of diversity generally and within the financial and investment industries specifically. It cited research findings by the Stanford Graduate School of Business, Morningstar, Catalyst and research by two groups discussed in a Scientific American article.

The report also cited a study released this year by the John S. and James L. Knight Foundation that noted an upward trend in diverse-owned private equity firms, with women representation increasing from 1% in 2004 to about 3% in 2016 and minority representation increasing from 2.7% to 3.6% over the same period.

Reprints Discuss this story
We welcome your thoughts. Please allow time for your contribution to be approved and posted. Thank you.

Related

7 Reasons Women Make Better Money Managers Than Men

Having more female money managers is a smart diversification strategy, author Meredith Jones says. Here are some reasons they often...

Most Recent Videos

Video Library ››