How to integrate diversity, equity and inclusion into your investment decisions 

March 8, 2023

Embracing diversity, equity and inclusion (DEI) could provide institutional investors with new investment opportunities while helping to deliver on a firm’s overall values and objectives.

DEI has become a central pillar for investors who are seeking to align their portfolios with their overall organisational values. Investors are increasingly embedding DEI into their investment approach to help them achieve long-term sustainable returns while keeping in line with shifting investment trends.

Research shows1 that about a third of women-owned and minority-owned private equity firms are top quartile performers among private equity firms overall. This demonstrates the vital importance of securing investment returns from a range of sources, and means that investors should embrace research, advice and solutions that can help them overcome the challenges of selecting the right DEI investments.

What do we use to define DEI investments?

1/3

The manager's firm is at least a third owned by diverse person(s)

50%

The investment committee compromises at least 50% diverse person(s)

50%

Portfolio managers compromise at least 50% diverse person(s)

Six things to look for in DEI managers

  • 1. A dynamic team with experience in the strategy and a strong firm culture

  • 2. Clear strategy that the team has experience executing

  • 3. Strong alignment with LPs through attractive terms

  • 4. An applicable track record (when available)

  • 5. Strong operational due diligence results

  • 6. Positive market references

Common DEI investing challenges

The market is moving toward better representation of diversity in portfolios and it is important to have access to the latest research, insights and advice to help you make informed decisions. You should consider integrating DEI considerations into your overall governance model and investment objectives.

It is important to identify diverse manager at different stages of development. We believe that building a balanced portfolio across diverse firms at varying stages of their journey has the potential to create a more diversified portfolio able to generate attractive risk-adjusted returns. Also, holding diverse managers to the same underwriting standards will help ensure quality of opportunities. 

With hundreds of diverse managers in the market today, making a choice can be overwhelming. It requires rigorous sourcing, research and due diligence. Spending time with diverse managers is crucial, as it is with all managers, to supporting strong manager selection.

There are diverse manager options in all private markets strategies today, making it possible to add diversity to whatever strategies you target. 

Once your firm’s values have been identified, it is important to create policies and targets that align with them. For DEI, we are seeing many institutions create a minimum percentage threshold to achieve relative to the amount of capital from their portfolios going to diverse managers. For others, it is about capturing the essence of their values around equality. No matter what the values are, there is today a large pipeline of opportunities that will help a firm to promote greater equality and help close the racial wealth gap by deploying capital to highly capably, yet capital deficient diverse groups. 

Business leaders and investment teams need to have a DEI plan in place before their stakeholders force them to act. Being proactive shows corporate boards, CHROs and investment trustees that the teams overseeing their investments are alert to the most pressing stakeholder priorities.

Considerations for integrating DEI into investments

Whilst integrating DEI considerations into investments comes with challenges, through robust research, advice and solutions, we believe that investors have the potential to build a sound strategy that finds a balance between empathy, an organisation’s beliefs and investment objectives.
  • Do your DEI research
    It’s important to understand how organisations address DEI. When we research managers based on DEI considerations, we look at historically underrepresented investment objectives.
  • Get some advice from a specialist
    Many investors seek third party advice on all aspects of an investment strategy, including reviewing existing exposures, reviewing and developing policies, and screening and due diligence services. 
  • Investigate the solutions available to you
    There are options out there to help you with your DEI strategy. You could decide to fully or partially delegate your DEI investments through a third party fund or create a direct programme. One of the benefits of fully integrated investment solutions is that it helps to alleviate capacity constraints on your internal team in market mapping the DEI space, while helping you seek access to top diverse managers. 

Explore the power of DEI

We explore ways to design and implement an investment approach that embraces DEI across private markets and discover the types of investments.
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    1 Source: The Knight Foundation. As of January 2019 | Ownership defined as 50% of equity or more; minorities defined as Hispanic, Black, Asian and Native American.