Minority- and Women-Owned Private Equity Firms Outstrip Benchmarks

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.