How Kellogg Foundation is interrupting racial bias in capital markets



Detroit, Mich. – Hidden prejudices show up in health and education outcomes that divide along racial lines. Implicit bias shapes capital markets as well.

Attitudes about race influence everything from where and with whom institutions place their assets, to which entrepreneurs and ideas get funded. Even egalitarian-minded individuals, research shows, can let race-based assumptions and stereotypes penetrate their decision-making.

Some investors are learning to interrupt implicit bias by becoming more aware that it exists and building more diverse teams. One investor, the W.K. Kellogg Foundation, is taking racial equity in investing further by making the business case for racial inclusion.

The Battle Creek, Mich.-based foundation, one of the first to allocate a portion of its endowment for mission-driven investments, is intentionally backing fund managers and entrepreneurs of color, and is seeking investments that systematically reduce bias in the financial system and broader society. Last week the foundation gathered its mission investments portfolio for a summit in Detroit and invited ImpactAlpha to sit in.

“If you are not looking at this, you are actually taking risk,” says Cynthia Muller, Kellogg Foundation’s director of mission investment. The foundation is no longer satisfied making only the moral case for racial equity. The new message: Reducing bias is aligned with the interests of investors. 

Implicit racial bias can cause investors to limit their pipeline, overlook highly qualified fund managers and entrepreneurs, and miss growth opportunities in sectors and products serving communities of color. Limiting the flow of capital and opportunities to people of color also poses systemic risks, contributing to income and wealth inequality and broad-based underinvestment in entire zip codes.

Solving for bias is on the radar of a growing number of investors. Fairview Capital Partners and Ford Foundation have launched a fund to invest through diverse fund managers as part of the foundation’s $1 billion endowment commitment to mission. Kapor Capital recently released data showing its portfolio outperforms by ‘closing gaps’ for communities of color. Illumen Capital works fund managers to boost returns by reducing implicit bias. Living Cities, which invests in communities on behalf of foundations and financial institutions, is learning that achieving economic justice means investing in racial justice.

Adoption of the business case for broader inclusion in the financial system is the biggest shift Muller, whose father is Black and mother indigenous Alaska Native, has seen since arriving at the foundation three years ago.

“The same way we structure portfolios and want them to be diversified to manage that risk,” says Muller. “We have to think about that risk with racial equity. That’s the place for us to address the wealth gap, and get more folks, more perspectives, more voices to the table.”

Racial-equity lens

For capital allocators concerned about risk, racial bias is a big one. By 2050, people of color will make up the majority of the U.S. population and workforce. Closing racial equity gaps that limit the economic contributions of people of color could add $8 trillion to U.S. GDP over that same timeframe, according to “The Business Case for Racial Equity,” a Kellogg Foundation-funded study.

The foundation established by cereal entrepreneur Will Keith Kellogg has long made grants to reduce racial disparities among youth in education, health and well-being. In 2007, the foundation declared itself an “anti-racist” organization and set about diversifying its staff and leadership. The 90-year-old foundation also expanded the set of investment tools at its disposal to advance racial equity.

The following year, Kellogg Foundation launched its “mission-driven” investment portfolio of market-rate and below-market rate investments to advance the foundation’s goals. The foundation committed $100 million from its endowment for mission-related investments. With exits, the foundation has committed about $166 million in such MRIs and another $52 million in program-related investments across 71 investments. 

A separate program makes bets on new managers. Kellogg Foundation’s Emerging Managers Program has placed $205 million with minority and women-owned investment firms. The aim is to help new fund managers build their track records and prepare themselves to manage more of the $7.3 billion portfolio. To date, three managers who have graduated from the program have taken on more of the foundation’s assets.

“Investing with a racial equity lens requires that we identify opportunities with people and in places traditional capital markets often overlook,” Kellogg Foundation president, La June Montgomery Tabron, wrote as part of a Stanford Social Innovation Review and Mission Investors Exchange series on racial-equity lens investing.

One of those overlooked places is Detroit, in the foundation’s own backyard. Kellogg Foundation’s $3.5 million loan, alongside $3 million from the JPMorgan Chase Foundation, launched the Entrepreneurs of Color Fund in Detroit in 2015. The fund has lent $6 million to 62 businesses, nearly all led by entrepreneurs of color, and claims a default rate of less than 2%. Last year the Detroit fund was more than tripled, to $22 million, and the program has been replicated in Chicago, San Francisco, New York and Washington DC.

Kellogg Foundation invested $4 million in 2017 into San Francisco-based Sixup, a student lending platform that has helped thousands of low-income students attain college financing by focusing on outcomes rather than credit scores. That financing gap, which predominantly impacts students of color, “is not currently being served by the capital markets. It’s not being served by the federal government. And it’s what is suffocating and preventing high attaining, low-income talent from getting through the system,” says founder Sunwoo Hwang, himself a first-generation college graduate. Last year Sixup secured a $24 million loan from Goldman Sachs and $4 million in equity and debt from the Rockefeller Foundation.

Media is a growing focus of the foundation’s racial equity investing. In 2017, the foundation joined a consortium of foundations that invested $150 million in Macro, a production company that seeks to tell authentic stories of communities of color. “One of my goals while I am still in the industry is to dispel this notion that movies that have people of color in them, that they won’t work,” founder Charles King told Hollywood Reporter. Macro has produced the Oscar-nominated film, Fences, which grossed $64 million, and Netflix hit Mudbound.

Muller says the same barriers exist in entertainment as in finance. “If we can get that message out. If we can start to monetize this content in a way where writers, creators and those folks are actually getting the benefit, and not continue to get creative extraction from all of their work,” she says. “That’s a win.”

By the numbers

Research is bringing the extent of implicit bias in financial markets into focus.

Women and people of color-owned investment firms manage between 1% and 5% of the $70 trillion in U.S. assets under management, according to multiple studies, yet women and minorities make up 70% of the population.

Minority startup founders don’t fare any better. Black founders received just 1% of venture capital over the last five years. Latino founders raised just 1.8% of venture capital.

In “Biased,” the new book by Stanford professor Dr. Jennifer Eberhardt, Eberhardt previews research on implicit bias in asset allocation she and her colleague Dr. Hazel Rose Markus conducted with Daryn Dodson of Illumen Capital. In short, they found allocators evaluated highly qualified Black-led teams more negatively than White-led teams with identical qualifications, according to the book.

“In an investment world that is 99% white and male, it may turn out that blacks are turned away not because they are less qualified than white men but because they are equally qualified,” writes Dr. Eberhardt.

This type of data is new, says Muller. Dr. Eberhardt’s research, she says, is helping investors prove “that this is really what’s happening. It’s not something we can ignore. Here’s how this translates into productivity.” And, says Muller, it helps prove how overcoming bias translates into the goals of investing.

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