Back to School: Women, minority-owned firms control small fraction of industry’s assets

Minority-owned private equity firms hold just 3.4 percent of the industry’s assets under management, a recent study led by Harvard Business School Prof. Joshua Lerner shows. Just 1.5 percent of all PE firms are owned by women.

While the industry shows signs of beginning to elevate women and minorities into the partnership ranks, “it’s improved off a tiny base,” said Lerner, who wrote the study with Bella Research Group on behalf of the John S. and James L. Knight Foundation.

Some institutions, including public pensions in Illinois and Texas, have begun to emphasize diversity in their selection of new PE fund managers. Private equity firms led by women and minorities are often small — the median AUM recorded by Lerner and Co. was between $300 million and $350 million — and therefore qualify for a variety of emerging-manager programs.

Some institutions, however, are prohibited from considering race or gender in their investment decisions. California’s Proposition 209, approved by voters in 1996, prevents state institutions like California Public Employees’ Retirement System from using race- or gender-based criteria when it hires contractors or external investment managers.

“Institutions don’t want to get pressured into making investments that may be below market,” Lerner said. “On the other hand, that doesn’t seem to be the story that’s here.”

Performance data for minority and women-owned firms remains relatively limited, the study says. But other studies cited by Lerner and Bella suggest the returns delivered by those firms are on par or superior to those generated by those led by white men.

“If we found that women and minority-owned firms had underperformed, that would be one thing,” Lerner said. “It was virtually identical to majority-owned firms.”

But it’ll be hard to make that case definitively until the breadth and depth of industrywide data on diversity improves, Lerner said.

Commercial databases for PE and real estate information do not provide information about the characteristics of firms’ management teams or ownership groups, according to the study. Lerner and the Bella research team compiled data from public pensions and other resources, cobbling that information together with what they could glean from Preqin.

“There’s a real need for data,” Lerner said, adding that many consulting firms he contacted refused to release any information about any analysis they’ve done on diversity. “This shouldn’t be information that’s hidden away.”

Action Item: For Lerner’s report:

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