In Private Investment, Diverse Fund Management Teams Have Opened Doors

Portfolio diversification is fundamental to effective investment risk management. The term “diversification” traditionally includes asset classes, investment approaches, industry sectors, and geographies. But a vital and often-overlooked dimension of diversification is the people driving portfolio decision making. This dimension of diversification may be especially important in private markets because an asset manager’s deal sourcing is often network driven. Greater gender, racial, and ethnic diversity among asset managers is often thought of as a social initiative when, in fact, it may provide another source of diversification in the pursuit of better risk-adjusted returns.

According to new research from BCG and Cambridge Associates, private equity and venture capital firms whose ownership is predominantly women or people of color may unlock access to differentiated deal flow (i.e., an increase in the variety of investments in a portfolio) for their limited partners (LPs) and other investors.

Key Findings:

Of the deals analyzed, 76% were financed exclusively by nondiverse private equity and venture capital firms, 17% of the transactions had deal syndicates with a mix of nondiverse and diverse firms, and 7% were investment rounds completed exclusively by diverse-owned firms. Here is what we found:

• Diverse asset managers are more likely to invest in early-stage deals than nondiverse firms as well as in historically overlooked companies.
• Because they tend to work within networks they are familiar with, many nondiverse private equity and venture capital firms (35%, according to our research) have not coinvested with diverse asset managers. As a result, they risk facing reduced exposure to differentiated deal flow and reduced engagement with diverse private fund managers in later rounds.
• Diverse asset managers are increasing their share of private market deals. From 2018 to 2022, the value of the deals led by diverse private equity and venture capital firms grew at 25% annually from a starting point starting of $33 billion. This is nearly twice the growth rate of deals completed by nondiverse firms. The number of private market deals led by diverse firms also grew by 14% annually, in the same period.

Read the full report here.