Investing in Latinx, Emerging Funds Good for Business, Society
Investing in diversity, minorities, and emerging fund managers is becoming increasingly important for a variety of reasons. Not only is it the right thing to do from a social, cultural and ethical perspective, but it also makes good business sense. Studies have shown that companies with diverse leadership teams and boards tend to perform better financially, and investing in emerging managers can lead to better risk-adjusted returns.
One group that is particularly underrepresented in the financial industry is the Latinx population. According to a 2020 report by the Latino Community Foundation and the Hispanic Federation, only 3% of asset managers in the US are Latinx. Furthermore, a study by the National Venture Capital Association found that only 1.8% of venture capital-backed startups in the US are founded by Latinx entrepreneurs.
These statistics demonstrate the need for increased investment in Latinx fund managers and entrepreneurs. Not only would this promote diversity and inclusion in the financial industry, but it would also provide access to a potentially profitable and undervalued market: The Latino population in the US is projected to reach 119 million by 2060, representing a significant consumer base and a valuable source of innovation.
Additionally, investing in emerging managers can lead to better risk-adjusted returns. A study conducted by the National Association of Investment Companies (NAIC) found that, over a 15-year period, minority- and women-owned firms had higher returns than the overall market, with lower volatility. Despite this compelling data, there is still a significant underrepresentation of minorities and women in the financial services industry, particularly in leadership positions. According to the Center for Talent Innovation, just 4% of top positions at financial services firms are held by women of color. Similarly, just 1% of venture capital partners are Black, and less than 3% are Latino.
To address this issue, it is important for investors to actively seek out diverse and emerging managers. This includes investing in funds that have a focus on diversity and inclusion, and also engaging with these managers directly. Additionally, investors can work to increase the pipeline of diverse talent by supporting programs and structuring initiatives that provide training, mentoring and continuity to minority and women-owned firms.
Moreover, investors should also consider implementing diversity and inclusion policies that are more extensive, achievable, and specific. The policies should be aimed at creating a culture where everyone is treated with respect, and there is equal opportunity for all. The policies should also be well-communicated, so that everyone in the organization is aware of them and can become internal and external ambassadors for those policies.
Furthermore, studies have shown that companies with diverse leadership teams have better financial performance. A 2020 study by McKinsey & Company found that companies in the top quartile for ethnic and racial diversity are 35% more likely to have financial returns above their industry median. Another study by Credit Suisse found that companies with higher levels of diversity in their leadership have better stock market performance.
Investing in emerging fund managers from diverse backgrounds can also lead to the discovery of untapped investment opportunities. A study by Cambridge Associates found that venture capital firms with diverse investment teams were more likely to invest in companies founded by women and minorities, resulting in higher returns.
One way to increase investment in Latinx fund managers and entrepreneurs is through the creation of dedicated funds or programs. For example, Bank of America has committed more than $500 million into about 100 emerging VCs led by diverse emerging managers. Another example is Plexo Capital, which is an institutional investor focused on investing in venture capital funds led by diverse general partners. It uses a distinctive model that values the unique perspectives of diverse investors to drive alpha and, as a byproduct, increase diversity in our ecosystem. Furthermore, the Latino Community Foundation and the Hispanic Federation have launched the Latino Venture Fund, which invests in Latinx-led startups and funds. The Ford Foundation has also launched the Building Institutions and Networks (BUILD) initiative, which provides funding and support to organizations led by people of color.
Another way is to increase the diversity of investors, funders, and decision-makers in the financial industry. This can be achieved through initiatives like mentorship programs, networking events, and diversity and inclusion training.
In conclusion, investing in diversity, minorities and emerging fund managers is a smart business decision, backed by hard data. Companies with diverse leadership teams and boards tend to perform better financially, and investing in emerging managers can lead to better risk-adjusted returns. Despite this, there is still a significant under-representation of minorities and women in the financial services industry, particularly in leadership positions. Investors should actively seek out diverse and emerging managers, work to increase the pipeline of diverse talent and implement diversity and inclusion policies to create an inclusive culture in the organization.