Increasingly, foundations are looking at investment managers who are in the early stage of their life cycle, managers raising a first or second institutional fund, managers raising relatively smaller funds with more targeted impact strategies, and managers whose businesses are minority or female-owned. Doing so ensures that opportunities are not missed and valuable voices which hold unique perspectives are heard. How we can support new leadership to disrupt the predominant paradigm?
At Confluence Philanthropy’s recent 2nd Annual Advisors Forum in San Francisco, Akasha Absher, Chief Consulting Officer at Syntrinsic Investment Counsel, a national investment consulting firm exclusively focused on nonprofit organizations and philanthropic private clients, moderated a plenary discussion on identifying and confronting biases in our investment process. Specifically, the group examined how these factors affect emerging managers and what can be done to shift this. The three-person panel included Andy Lower, Founder of ADAP Capital; Rachel Robasciotti, Principal and Wealth Manager at Robasciotti and Phillipson; and Arjan Schütte, Founder and Managing Partner at Core Innovation Capital.
Building Access
Absher began by stating the problem at hand. In the U.S. census in 2018, 61% of people were white, 18% Hispanic, 13% black, and 6% Asian, yet 86% of managing directors are white. “In the investment management world, what we are seeing is we are not even marrying the consensus of... the people we are," she said. “We have an issue that we are here to discuss and change.”
Emerging fund managers often face additional challenges because they are unable to entice big players—like JPMorgan and Goldman Sachs—to become willing to take a chance on them. She noted the inherent risk of hiring an emerging manager who does not perform well versus hiring an established institution which does not perform well. “How do you change power structures and build access to networks? What have you seen work?” Absher asked.
Schütte recalled opening his first fund and struggling to find support, given his lack of experience with venture capital. “I figured no one was going to place a bet on me or on my team,” he admitted. After sitting on the steps of Goldman Sachs’ New York City headquarters for weeks, someone relented and anchored their first fund, which he acknowledged as the tipping point. He flagged the critical importance of The Ford Foundation for being a catalytic seed investor in the fund’s early days prior to Goldman Sachs’ involvement.
Robasciotti illustrated the importance of helping people understand the systems that they are working within. As a queer, African-American woman who grew up in rural poverty, she has had an entirely different experience learning the culture of financial services through a “guess and check” process. “Because I am a woman, I am queer, I am black; I think that there is a sensitivity around giving feedback,” she said. “I would really love to learn the system more efficiently and I would love to receive feedback that would help me do that.” Essentially, she expressed the importance of taking the time to provide constructive feedback when approached by an emerging manager. She identified the dominant culture of politeness as a meta-barrier to providing constructive feedback, reiterating the importance of honesty and directness.
Lower highlighted his role, as a white man, of challenging the status quo and changing cultural norms. “The failure of not acting is bigger than the failure of not stepping forward.” He stressed the importance of investing with values, challenging our unconscious biases, and continuing to support the pioneers who drive innovation.
Risk vs. Return
Next, Absher tackled what she called “the elephant in the room” for emerging managers and impact investing as a whole. “[Emerging managers] are inherently more risky [sic]... you are contradictory to the goal of maximizing returns for a lot of the manager’s clients. How would you answer that?”
Robasciotti replied that investors need to broaden their idea of a return. “Reasonable return isn’t just a personal, individual financial return,” she said. “When we talk about risk versus reward, what reward are you measuring?” Return has been bifurcated into financial return and social return, when they should coexist.
Lower disagreed that emerging managers are inherently riskier. “Who says we are inherently risky? If you actually look at the numbers, first-time fund managers are outperforming.”
Opportunities for Change
When Absher asked about the opportunities for change, Robasciotti shared that the primary driver is whether you want to make an actual change or simply report back to your board. For real change to happen, “power has to shift,” Robasciotti stated, and this must include changes in who manages portfolios.
Schütte reiterated that people wanting to look good is “exhaustingly prevalent” in his experience. He shared that, given this, his strategy is to do a lot of active translation of societal needs into large opportunities, which he tends to find more compelling to investors. ”The closer I sound to philanthropy, the more allergic my investors become.” To mitigate against the real temptation and risk of just seeking financial returns, Schütte ties his compensation to their social impact.
The panelists shared policy changes that could make things easier for emerging managers. Multiple panelists discussed the need to revisit the RFP process to ensure it is doable, and the due diligence requirements (i.e. AUM thresholds, track records, etc.) to ensure that they are feasible for an emerging manager. Schütte noted he would do away with RFPs and focus on personality and ability. “It’s all about people, and I would get rid of all that garbage and spend time with high-potential managers,” he said, adding that performance is secondary for emerging managers. He believes firms should be more interested in emerging managers with grit, intuition, and a progressive worldview than those with a track record. He articulated, “As a white male, I am judged on potential, and people that do not look like me get measured on their track record at best.”
Panelists also highlighted the need for intentionality. Robasciotti shared the proactive steps that her organization took to get people of color and women: finding people with the right skills and actively training and supporting them along the way. Lower agreed and shared that the only way to promote diversity in the profession is by changing the way we evaluate. “There is a process one needs to go through to ensure that we are getting that inclusion. There is a need to take a step back and assess how we are fulfilling our potential to have that influence,” he advised.
