Our world is constantly evolving, with opportunities for positive change driven by social momentum.
Over the past few years, the importance of diversity, equity and inclusion (DE&I) within business has become an emerging theme. A growing number of companies view DE&I as more than just the right thing to do — embracing it as smart business strategy. As the World Economic Forum stated in early 2019, “The business case for diversity in the workplace is now overwhelming.”[1] And regular reports from McKinsey outline the potential financial growth that could be unleashed by establishing equality across all business sectors.[2]
With mounting evidence that diverse views, backgrounds, outlooks and experience can lead to better decisions, we believe that the time has come for a change in corporate behavior. We’ve seen companies of all sizes begin to embrace this new normal, and the asset management industry is no exception.
Decision-making skills are critical throughout the investment process — from strategy to security selection — and a broad range of views should be a powerful asset. If a well-diversified portfolio is more robust and resilient, it makes sense for this diversity to be reflected across the people responsible for investing its assets.
At Mercer, identifying emerging themes that will have a significant impact on our clients’ portfolios is fundamental to what we do. Our independent and forward-looking investment research has been focused on the impact of DE&I on returns for some time. Whilst much of this applies to all of our research of asset managers this piece is focused on private markets.
Our 2019 report[3] on DE&I examined how a diverse team might create a stronger approach to investment than one comprising people with similar views or experiences. We concluded that “a diverse team with shared values is more likely to outperform its less-diverse peers” — and this plays a part in how we assess fund managers around the world.
DE&I is embedded in our analysis of the 7,000+ funds we research, rate and monitor. Our investigations of portfolio management teams include the genders of key decision makers. Disappointingly, in 2019, we found 63% of funds listed no women in this position of authority.[4] Disclosure about race, sexuality and other diversity indicators was equally limited.
But with our global reach and scale, we’re positioned to challenge, question and encourage positive change.
Within private equity, we now include several DE&I factors for investors to consider, and we also provide innovative solutions for private market implementation. One consideration is whether the manager’s ethos aligns with a core belief in the advancement of groups within the sector that have traditionally been in the minority. Our robust research and analysis procedures also include strict policy and process criteria regarding ownership and investment strategies.
Untapped potential
We have identified a cohort of highly rated managers owned and operated by women and minorities (MWBE). The cohort includes people of color, people with disabilities, veterans and those identifying as LGBTQ+ — groups that have traditionally been underrepresented in senior and ownership roles.
These managers run consistent investment approaches in private markets to produce impressive results — and are growing in both number and reputation for returns. Within the private asset universe, there are more than 650 such managers according to data company Preqin.[5] The number has been steadily growing over the past decade and accounts for an increasing percentage of assets raised.
Performance matters
Investors are not allocating to these firms out of a sense of duty or moral obligation. Institutional investors around the world are increasingly demanding to know — and challenging — the makeup of the teams managing their money[6] citing it as a “lever for improving performance.” In the world of investments, private-equity-specific data show that both female- and minority-owned firms rank in the top quartile for generating returns.[7]
Percentage of diverse PE funds raised vintage year
Source: Bella Research/Knight Foundation. 2018 Diverse Asset Management Assessment, January 2019.
In fact, between 2011 and 2018, 79% of MWBE funds run by members of the National Association of Investment Companies (NAIC) in the US performed better than the median quartile.[8] A further 57% of the MWBE private equity funds were in the top quartile on a total-value-to-paid-in (TVPI) basis in the vintage years between 2011 and 2018.[9]
Our research shows significant untapped potential within this sector. We also believe that considering a broader range of managers is likely to encourage a greater spread of investment ideas from previously undiscovered quarters, leading to expanded choice and diversified return profiles.
We have a strong history of leading on the transformation of the investment landscape, evidenced by our pioneering, forward-focused research on sustainability. We’re confident that this new direction is the start of something powerful — which could benefit not only investors’ portfolios but society as a whole.
Discover what we can do to help you today, and reach out to us to explore further.
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Raelan Lambert, Global Head of Alternatives
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Samantha Davidson, U.S. Investment Solutions Business Leader, CFA
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Amy Ridge, Principal, Private Equity Amy Ridge, a Principal in our private equity group, leads sourcing, underwriting and portfolio management for institutional investors. Ms. Ridge has over 14 years of private equity experience, including 12 years at Mercer (including time at Pavilion Alternatives, which was acquired by Mercer in 2018) and is based in Sacramento, CA. Ms. Ridge recognized the potential of increasing diversity in the alternatives market and helped launch Mercer’s first alternatives-focused diversity and inclusion fund, for which she serves as Chair of the Investment Committee. Ms. Ridge is helping to promote greater exposure of diverse managers by expanding coverage within Mercer’s research database. She is an active member in the diversity and inclusion community, including serving on various panels on the topic. Ms. Ridge also serves on Mercer’s private equity and private debt ratings review committees and is an Investment Committee member for Mercer’s sustainable opportunities fund. |
Billy Charlton, Global Head of Private Markets Data Analytics and Research
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[1] Eswaran V. “The Business Case for Diversity in the Workplace Is Now Overwhelming,” April 2019, available at https://www.weforum.org/agenda/2019/04/business-case-for-diversity-in-the-workplace/.
[2] McKinsey’s Diversity and Inclusion insights, available at https://www.mckinsey.com/featured-insights/diversity-and-inclusion.
[3] Mercer. How Diversity and Culture Impact Mercer’s Manager Ratings, September 2019, available at https://www.mercer.com/content/dam/mercer/attachments/private/nurture-cycle/gl-2019-wealth-how-diversity-and-culture-impact-mercer-manager-ratings-mercer.pdf.
[4] Mercer. “Diversity Dressing — The Hidden Figures,” May 2020, available at https://www.mercer.com/our-thinking/wealth/diversity-dressing-the-hidden-figures.html.
[5] Bella Private Markets. 2018 Diverse Asset Management Enhanced Performance Analysis, January 2019, available at https://bellaprivatemarkets.com/s/Enhanced-Performance-FINAL.pdf.
[6] Business Wire. “Canadian Investors Representing $2.3 Trillion Pledge to Promote Diversity & Inclusion in Their Portfolios and Institutions,” October 2020, available at https://www.businesswire.com/news/home/20201001005261/en/Canadian-Investors-Representing-2.3-Trillion-Pledge-to-Promote-Diversity-Inclusion-in-Their-Portfolios-and-Institutions.
[7] Knight Foundation. Diversifying Investments, January 2019, available at https://knightfoundation.org/wp-content/uploads/2019/01/2019_KF_DIVERSITY_REPORT-FINAL.pdf.
[8] NAIC. Examining the Returns 2019, available at http://naicpe.com/wp-content/uploads/2020/03/2019-NAIC-ExaminingTheResults-FINAL.pdf.
[9] Ibid.
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