In Private Investment, Diverse Fund Management Teams Have Opened Doors - Boston Consulting Group

Research from Boston Consulting Group and Cambridge Associates, based on an analysis of more than 84,000 US-based deals completed by private equity and venture capital firms, finds that diverse-owned firms may provide limited partners with access to differentiated deal flow that nondiverse managers do not reach. The study frames diversity of asset managers as a portfolio diversification consideration, not solely a social initiative, particularly in private markets where deal sourcing is often network driven.

From 2018 to 2022, the value of deals led by diverse PE and VC firms grew at 25% annually from a starting point of $33 billion, nearly twice the growth rate of nondiverse firms. The number of deals led by diverse firms grew 14% annually over the same period. Of the deals analyzed, 76% were financed exclusively by nondiverse firms, 17% involved mixed syndicates, and 7% were completed exclusively by diverse-owned firms. That 7% represents close to 29% of all deals led by diverse firms. The trend is especially pronounced among Black- and Hispanic-run firms, roughly two-thirds of whose deals fall outside the deal pool of nondiverse managers. The research also found that 35% of nondiverse PE and VC firms have not coinvested with diverse managers, suggesting LPs may need to invest directly with diverse GPs to access this deal flow.

The study also reports that diverse teams are more likely to invest in early-stage and overlooked companies, and that they perform as well as their broader early-stage peer group despite the higher risk profile. Within the dataset, diverse-only managers accounted for 10% of pre-seed and seed rounds, and such rounds were five times more likely to feature diverse-only managers than Series D+ rounds. An analysis of 1,500 fintech transactions found diverse managers more likely to invest in lending or personal unsecured loan deals targeting historically underserved communities.

Citing a 2021 Knight Foundation study, the report notes that 98% of US assets across asset classes are managed by nondiverse teams, and that minority-led firms made up only 5.1% of PE and VC firms and 4.5% of assets, while women-led firms accounted for 7.2% of firms and 1.6% of assets. The Knight study found that diverse managers' returns did not statistically differ from nondiverse peers after controlling for fund size and market conditions. Juan Martinez, Knight Foundation vice president and chief financial officer, said that research has found diverse-led funds perform at least as well as other funds.

For LPs, the report recommends building more diverse investment teams, using merit-based manager selection, and examining diligence frameworks for criteria that may screen out diverse firms, such as narrow definitions of work experience or capital contribution requirements tied to large amounts of personal capital rather than liquid net worth. It also cautions that dedicated diverse-manager allocation pools with ceilings may limit those managers' access to the broader capital base.