For the second time in six months, a new study illustrates how diverse firms keep exceeding other yardsticks when it comes to investment performance.
The Examining the Returns: The Financial Returns of Diverse Private Equity Firms, a report by the National Association of Investment Cos. (NAIC), suggests that institutional investors looking to generate greater returns should consider allocating capital with diverse-owned private equity firms.
The 2017 report, released last month, quantifies the degree to which these diverse-owned firms consistently outperform their respective benchmarks and generate alpha to limited partners.
The NAIC is a trade group with over 40 member firms representing over $85 billion in assets managed. Its roster includes many companies that are BE 100s private equity firms.
The NAIC report showed that diverse-owned firms generated a net of fee Internal Rate of Return (IRR) of 16.15% for the 10-year reporting period ending in December 2015, versus11.3% (IRR) for the Cambridge US Buyout benchmark for the same period. The data included the financial performance of 39 funds from 17 NAIC firms.
Other findings from the report revealed:
- Diverse PE Funds included in the NAIC Diverse Private Equity Index outperformed the median Cambridge U.S. Private Equity funds during most vintage years.
- On an IRR and Multiple on Invested Capital (MOIC) basis, Diverse PE Funds outperformed 62.5% of the time.
- On a Distributed to Paid-in capital (DPI) basis, Diverse PE Funds outperformed 56.3% of the time.
- Over longer time horizons, Diverse PE Funds included in the NAIC Private Equity Index consistently outperformed both median and upper quartile funds in the Cambridge U.S. Private Equity and the Cambridge U.S. Buyout cohorts.
The Examining Returns report updates a similar study conducted in 2012 and it confirms that prior report’s similar findings of outperformance from the often-overlooked segment of the private equity industry. Both conclude that superior performance has led to increased capital flowing into these firms, led by New York Common, Texas Teachers Retirement System, Texas Employees Retirement System, New York Teachers Retirement System, CalPERS, CalSTRS, Verizon, Exelon Corp., and the Virginia Retirement System.
“While outperformance from diverse-owned private equity firms may come as a surprise to some, it is not a surprise to the increasing number of institutional investors that have come to rely upon the alpha generated by diverse-owned firms to increase the funded status of their pension plans or to provide income to expand their foundations and endowments, Robert Greene, president and CEO of NAIC. said in the NAIC Website report
Another firm, the Knight Foundation, is committed to investing with diverse managers.
“Knight Foundation has invested close to $600 million though firms owned by minorities and women, with no compromise on performance. In fact, many have outperformed their benchmarks and top performers in their sectors,” said Juan Martinez, Knight’s CFO/VP Finance.
“A study we commissioned earlier this year found no performance-based explanation for the low level of diverse ownership in asset management firms. We believe, and a growing body of research shows, that diversity and inclusion strengthen the workplace, and lead to better decisions, especially in complex environments like investing,” Martinez said.
Still, the total invested with diverse-owned managers remains a disproportionately small amount of the whole. In many cases, the AUM allocated to diverse asset managers represents 10% or less of an investor’s total investable assets, the NAIC reports. Among its goals is to eliminate that disparity.
Vijay Advani, the CEO at Nuveen, investment manager pension giant for TIAA, commented on the NAIC report. Nuveen had $948 billion in assets under management as of Sept. 30, 2017, and operations in 16 countries.
“It is encouraging to see more and more data emerge that demonstrate the positive impact a diverse and inclusive workforce has in building successful businesses and—equally important—building strong and diversified portfolios for investors,” Advani says. “Much like a well-diversified investment portfolio, different perspectives and viewpoints help lead businesses and managers to better decision-making on behalf of their clients.”
He added, “We believe an unwavering commitment to greater diversity and inclusion is a fundamental requirement of any firm striving to be a premier global investment manager. We also know that our industry can do much more to attract, retain, and develop a more diverse workforce that draws upon a larger pool of talented professionals. It is an exciting time for our industry as we work to address this important issue by tapping into a greater diversity of potential that better reflects the global markets we serve.”