Ford Foundation Drives Push for Diversity in Asset Managers

BY LUIS GARCIA | UPDATED MAY 30, 2023 06:30 AM EDT

The foundation has committed roughly $400 million to strategies that include boosting diversity among asset managers

The Ford Foundation is doubling down on increasing diversity in the asset-management industry after pouring nearly $400 million into “mission investments" over the past six years.

The New York foundation—one of the country’s most well-known and oldest charitable organizations—co-led more than 100 participants in a $168 million fund raised by impact investor Illumen Capital, which wrapped up the effort earlier this month. As a fund-of-funds manager, Illumen backs private-equity, venture-capital and growth investment strategies while seeking to help fund sponsors increase diversity in their portfolio holdings.

The Illumen commitment came out of a broader initiative started by the Ford Foundation in 2017, when it pledged to invest as much as $1 billion, or about 8% of its assets at the time, in private-capital strategies that would produce both financial returns and social benefits. So far, the foundation has deployed about $400 million.

Promoting diversity among asset managers became a focus for the foundation because of the disproportionately low percentage of private capital managed by firms owned by women and minorities, said Roy Swan, the foundation’s director of mission investments. The foundation also has concentrated on other areas such as affordable housing, financial inclusion and quality job creation.

Swan points to a 2021 Knight Foundation study that evaluated diversity among asset managers. The study, co-authored by Josh Lerner who teaches investment banking at Harvard Business School, showed that funds led by women and/or racial or ethnic minority group members—including Hispanics, Blacks and Asians—represented 1.4% of $82.24 trillion in privately managed assets, including nearly $74.7 trillion held by mutual funds. Meanwhile, women comprised 51% of the U.S. population and minorities 38% at the time, according to 2020 U.S. census data.

A consensus exists that companies with a diverse workforce benefit from the different perspectives employees bring to their jobs. Lack of diversity among asset managers raises concerns about imbalances in their access to capital and jobs created by portfolio companies, researchers say.

“In a capitalist system, if you don’t have access to capital, what you have is a problem," Swan said. “A lot of socio-economic problems can be traced back to lack of access to capital."

Among the more than 50 private-capital fund managers backed by the foundation’s program to date, women or members of minority groups own stakes of at least 25% in roughly four out of five fund managers, he said. Investing in both individual fund managers and those that deploy funds-of-funds such as Illumen enables the foundation to expand its reach, Swan added.

“If we want to really be impactful, let’s not take the time it takes to go one-by-one," he said of the strategy. “Let’s just allocate to a fund-of-funds that already knows probably thousands of diverse fund managers."

While women- and minority-owned fund managers represent the majority of Illumen’s holdings, the firm’s investment parameters allow it to back managers owned by white men when those firms seek to increase diversity through their commitments, said Daryn Dodson, Oakland, Calif.-based Illumen’s managing director.

Those managers, he added, participate in the same mandatory bias-awareness training as the rest—including spending two days in Montgomery, Ala., in a program designed to examine America’s history of slavery, lynchings and mass incarceration. That history led to racial and gender biases that plague the U.S. asset-management industry today, according to Dodson.

The Knight study showed that no significant disparity exists between the performance of firms owned by women and minorities compared with those owned by white men. It classified 5.1% of U.S. private-equity firms as minority-owned and 7.2% as women-owned, but said the amount of capital they control is disproportionately lower.

The foundation’s impact investment program produced an average annual return of 28% through 2021, according to a review Darren Walker, the foundation’s president, published last year. Walker cautioned that it was too soon to evaluate the success of the strategy and that rising inflation and interest rates could weigh on future performance.

Swan declined to elaborate on the program’s present returns, saying only that backing diverse managers has delivered on the foundation’s goals of producing profits while making societal gains. He added that the typically smaller size of firms owned by women and minorities actually can help boost performance, partly because they can be more nimble.

“If you had $10 million, as opposed to $100 billion, under management, it’s easier to double your capital," he said.

Write to Luis Garcia at luis.garcia@wsj.com