Seeding Impact | August 3, 2022

Combating bias in asset management with catalytic capital and inclusive due diligence

Najada Kumbuli

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Guest Author

Najada Kumbuli

Editor’s note: This blog is part of ImpactAlpha’s series, “Seeding Impact,” authored by participants in the Catalytic Capital Consortium (C3) Seeding Learning Labs. Key insights have been published in a C3 Guidance Note (for more, see the executive summary and full report). C3 sponsors ImpactAlpha’s catalytic capital coverage.

Catalytic capital providers have at least one thing in common: commitment to address systemic challenges with systemic solutions. One of the key reasons why less than 0.3% of U.S. venture capital goes to Black women-owned businesses is because less than 1% of U.S. venture firms are led by Black women. 

This reality is not much different in emerging and frontier markets where women entrepreneurs face huge capital-raising gaps and women investors comprise less than 8% of asset allocators

Combatting systemic bias calls for systemic solutions: To channel more capital to diverse entrepreneurs we need to channel more capital to diverse fund managers. More importantly, we need to take it a step further and take concrete action to diversify investment firms at large because it is good for society and good for business.

Equity lens

One of our investment priorities is to invest in emerging and diverse fund managers, first closes, and junior tranches with the goal to reduce the perceived risk of these transactions and crowd in additional capital at scale. 

In addition, we have incorporated a gender equity lens across all our investment activity.

1. Screening in. We have prioritized diversity by taking a dual approach, by 1) investing in women-led fund managers that invest in gender-diverse and inclusive small businesses (more than 50% of our investments to date), and 2) investing in fund managers who are committed to further improving their diversity within their firm and their operations.

This approach has allowed us to take a “screening in” versus a “screening out” approach with the goal to support both those that are best in class from a gender equity and diversity lens perspective and those that have a genuine interest and commitment to becoming better. If we want a more inclusive and diverse capital market ecosystem, we need all hands on deck.

Our minimum requirement for our private market investments is 2X Criteria alignment. Further, we work with our investees to incorporate a gender lens across many facets of the firm’s governance, leadership, workforce development as well as their investment strategy, investment products, and clients, working with the fund manager hand in glove as these issues are nuanced and contextual depending on the sector, geography, and asset class we are investing in. 

2. Aligning capital. We have found that it is important to tailor our diversity lens and expectations depending on asset class. For example, in the private equity and venture capital space, limited partners like ourselves but also fund managers themselves have significant ownership and high level of influence, which make these conversations strategic.

In addition, this capital tends to be at the early stage of a fund’s and a company’s journey; therefore, you are working to build an equitable and diverse foundation from the start.

Across all our VC investments we have incorporated a gender lens at three distinct levels: 1) Governance and Leadership 2) Investment Strategy and Portfolio Management and 3) Client / Beneficiaries. The Beacon Fund is a great example of the types of investments we have made and the way the fund manager has incorporated a gender lens across all its activities.

On the debt side, where investors have less “ownership and influence” we have increased ours by coming in junior tranches or pairing our investments with grant capital for technical assistance or market-building opportunities (e.g., accelerator programs focused on supporting women entrepreneurs, etc.).

For example, last year we invested in the Southern Opportunity and Resilience Fund, which focuses on providing debt capital to women- and minority-led micro and small businesses in the U.S. South to address systemic barriers to accessing capital by diverse entrepreneurs exacerbated by the COVID 19 pandemic. Our approach was to invest in the junior tranche of the fund as well as provide a grant to Winrock International to get businesses ready for capital. 

3. Reducing unconscious bias. We have standardized our diligence process to ask the same questions and information from all our potential investees to give equal opportunity to everyone and avoid unconscious bias and mistakes that other investors have made in the past

We have also included specific gender / diversity questions in the due diligence process related to policies, initiatives, mandates, etc., within the fund manager and the portfolio companies in which they invest. This has helped us set the tone from the start and monitor progress over time.

We have also been prioritizing investments in fund managers whose performance and payout mechanisms are tied to impact outcomes, in particular diversity outcomes (reaching small businesses led by diverse teams, improving their own team diversity, hiring practices, etc.).

Lastly, we ask our fund investees as well as their portfolio companies to report annually on diversity (gender, race, etc.) to measure progress over time but also help us make better informed decisions in the future.  

4. Recalibrating “track record.” Most diverse fund managers tend to be emerging fund managers, launching their Fund I, II or IIIs, as a result scoring lower on the traditional “track record” key performance indicator. We have augmented our definition of “track record” by including analogous track record from previous investment experience and included their experience as operators, senior leaders, ecosystem players, etc., which reflects their ability to not only run the firm but also source, pick and manage investments.  

Reaching marginalized populations in under-represented groups requires seeding and investing in new strategies, new business models, and/or new managers. Having clarity on the approaches and tools that catalytic capital investors use to advance equity, diversity, and inclusion can have a powerful multiplier effect in addressing systemic capital barriers. 

Najada Kumbuli is head of investments at Visa Foundation.