What challenges do you face advising LPs on diversity?
It’s certainly easier if you have a new portfolio that you’re building out, because you aren’t constrained by existing relationships.
It’s much more difficult for a portfolio that is fully built out where we want to increase diversity over time. Some of the larger client portfolios we work with have an emerging manager programme where we might make smaller commitments to emerging managers to test them out with an eye towards building to a larger commitment over time if the manager executes well. Since many emerging firms are diverse, that’s one way to have a more immediate impact.
Thinking about various strategies, there seems to be a broader opportunity set in the venture space. Venture firms tend to be on the cutting edge, investing in the newest technologies and are always looking for the next best thing. Many of the diverse groups we’re seeing are in the venture space.
It’s more difficult to find opportunities in the buyout space, and that’s a result of it typically being an all-boys club.
We’re seeing many firms taking small steps in the right direction, but I think that view is going to win the day for a while.
How do you make the case for diversity?
Data has shown that diverse managers are overrepresented in the top quartile of performance. Our funnel of managers that we’re doing research on reflects that we are spending a lot more time with diverse managers. Even for those clients frankly that aren’t asking for diversity, I’m putting it in their portfolios. In fact, nearly 60 percent of our global client base has some level of investment in diverse managers, many of which do not have diverse manager mandates.
At CA we fundamentally believe that strong investment performance depends in part on the diversity of ideas, backgrounds and experiences of the managers with whom we invest on behalf of our clients. Roughly between 20 percent and 30 percent of the commitments I’m making each year for clients are to managers that I would consider to be diverse. The definition of diverse varies across the industry and can be different for each institution. At CA, we use a broad definition to include underrepresented groups, focusing on both ethnic and gender diversity.
Is the collection of diversity data simply a data exercise for some LPs to avoid potential backlash from their boards, or are you seeing a genuine interest here to make some changes?
I have not felt it to be a data exercise at all. My experience is that people really care about this, and they get very passionate.
The conversations around setting out the definition of what diverse means to that particular institution and what the investment policy statement should say on the matter is a discussion that often draws out for quite some time. It’s not a, ‘we’re going to sit down in a meeting and hash this out and then we’re going to have this definition’. It tends to span over multiple meetings. Everyone is coming to the table with a higher level of understanding, having spent more time educating themselves, and coming with a more solidified view to those conversations.
From what I’ve seen, it’s not window dressing. It has been very intentional and well thought through.