The Reconstruction | April 15, 2021

Grounding investors in history to ensure this Reconstruction delivers on its promise

Daryn Dodson
Guest Author

Daryn Dodson

For us at Illumen Capital, the echoes of history are never far from the work at hand. We know we can only begin to address the systemic effects of racism if we do the work to understand the foundational events and policies.

I recently had the pleasure of engaging in a conversation with my friend and colleague Monique Aiken, who hosts The Reconstruction, a podcast on ImpactAlpha that promises to “introduce people, projects and policies that center Blackness in the service of economic liberation for all.” 

The series’ name – The Reconstruction – has been lingering in my mind. We know today that the period of aspiration after the Civil War was short-lived and unfulfilled, and even led to massive retaliation through racial lynching terror, taking the lives of more than 5,000 Black workers, entrepreneurs, teachers, children and many others.

We all have a role to play in ensuring this Reconstruction lives up to its promise of building and sustaining equity for communities who have been marginalized by race. We must not allow this opportunity to repeat the unfulfilled promise of the first.

Impact experience

For this very reason, we require the funds in which we invest to participate in an Impact Experience, a multi-day convening designed to impart on attendees the historical context and ongoing realities of inequality and racial bias. By connecting the dots of slavery, the period of racial lynching terror, Jim Crow and mass incarceration, we help investors begin to understand the history that led to the racial disparities seen across investing today.

These gatherings are often focused on Montgomery, Alabama, a city rich in civil rights history and the location of the National Memorial for Peace and Justice and the Legacy Museum. In Montgomery, we hear directly from Ms. Josephine Bolling McCall. 

Ms. McCall’s father, Elmore Bolling, was a successful entrepreneur, owning a thriving trucking company and serving as a leader in the local Black community. When Ms. McCall was just five years old, her father was lynched by a group of white men, who were threatened by his business achievements – a story chronicled in Ms. McCall’s book “The Penalty for Success.”

Until this day, this lynching remains unsolved. This story is raw, emotional and infuriating. And there is also a throughline that connects this story to the findings of research we conducted with Stanford SPARQ – that Black fund managers who perform well face more entrenched bias. 

We held a wide-ranging discussion on how investors can optimize their portfolios by learning how to better identify, evaluate and invest in managers and companies that have historically been and continue to be overlooked and underestimated.

Racial disparities

We find it necessary to ground our strategies in historical context across our investment themes, including health and wellness, education, financial inclusion, and climate and sustainability – systems where the disparities facing communities of color are stark.

Health care. We know that Black people in this country make up 13% of the U.S. population, but only 4% of current physicians, and less than 7% of recent medical school graduates. And we remember The Flexner Report, a landmark, book-length report written in 1910 that laid the framework for medical school education in this country. According to this report, African-American physicians should be trained in “hygiene rather than surgery, and should primarily serve as “sanitarians” whose purpose was “protecting whites” from common diseases like tuberculosis. As a result, all but two Black medical schools were closed. This is why Illumen’s thesis includes investing in and reducing bias within the healthcare sector. 

Education. We know that in 2012 schools with 90% or more students of color spend $733 less per student per year than schools with 90% or more white students. And then we remember that Plessy v. Ferguson upheld the constitutionality of state segregation laws under the “separate but equal” doctrine, including the education system. This history underpins Illumen’s strategy to invest in education technology to reduce disparities facing kids of color within the education sector. 

Wealth gap. We know that the Black-white racial wealth gap has widened over the last 50 years, with median Black household wealth being 8.7% of median white household wealth (Washington Post). And then we recall that the New Deal, while fostering homeownership in white communities, largely excluded people of color from one of the most common pathways to wealth creation. Through the Home Owners Loan Corporation, our federal government prohibited government-insured lending to non-white neighborhoods, a precursor to redlining.

Financial inclusion. The events of the past 12 months – beginning with Covid-19, and then with the uprising that followed the murders of George Floyd, Breonna Taylor, Ahmaud Arbery and now Daunte Wright  – have laid bare the systemic economic, health, and criminal justice inequities facing communities of color. Approximately 40% of Black small businesses were forced to close because of the pandemic, compared to just 20% of white businesses. Black and Latino people in the US have been three times more likely to contract COVID-19 than their white counterparts, and nearly twice as likely to die from it. These historical dynamics are a driver of our investment thesis on financial inclusion.

And yet I have hope….

…Because of the outstanding teams, including those led by Black and Latinx fund managers in our portfolio, are actively investing in companies addressing many of the disparities faced by communities of color. 

…Because we’re beginning to see early signs of progress across our portfolio with respect to reducing racial and gender bias, with capital flowing to underrepresented entrepreneurs and teams becoming more diverse and inclusive.

…And because more and more asset allocators at foundations, endowments, family offices, corporations and pension funds are choosing to act on evidence that strategically including underrepresented women and people of color can lead to outperformance, and are beginning to address gaps across their own portfolios.

Daryn Dodson is founder and managing partner of Illumen Capital.