The Role of Limited Partners in Investment Prosperity

Grit Daily News

The people making the most of the big decisions in the investment world – both in venture capital and private equity – are predominantly white, male and Ivy-League. This has both financial implications (less diverse partnerships are less likely to have successful outcomes, for example) and ethics.

But what about the (often neglected) role of limited partners in trying for more diversified GP structures? Given that investors behind venture capital and private equity funds – often institutions, family offices, pension funds and (university) grants – one would think that they have a great deal of importance for greater diversity because they are in favor of their finances. .

A look at smaller LPs

One such influencer believes that the power of LPs in driving diversity is really important.

“(LP) will be the biggest lever for change … if the GP gets the same questions two or three times, it will scale,” said Helena Hasselmann, CEO of Stardust Equity.

According to Hasselmann, at Stardust they ask doctors to ask questions such as how do you intend to hire more GPs and what is the gender ratio of management to portfolio companies? They also periodically invest in landmark investments, “some of which are linked to the goals of diversity,” he said. These may include benchmarks, such as adding a woman or person of color to a fund advisory committee. Some GPs are even struggling with this relatively easy task, but Hasselman said progress is being made.

Often based on a more value-oriented approach, LPs, such as the government-owned pension fund BlackRock and Standard Life Aberdeen, have taken steps to increase pressure on VCs and other money managers, for example by integrating into diversity initiative “” And including questions about diversity in the fund’s due diligence.

Various boardroom

One particular change LPs can and have been pushing for is the diversity of conference venues in companies that support VC and private equity.

Charlotte Laurent-Ottomane is leading a UN-based initiative called Tripartite Coalition. Since 2008 she has been working with large LPs, such as CalSTRS or the New York State Common Retirement Fund, to place more women in corporate boards of both public and private companies.

For her, one of the challenges VCs and private equity companies face is how they fill their board seats.

“Depending on the size of the investment, the negotiators end up with the negotiating executives,” he said. “As there are not many senior women representatives at the moment, the portfolio management board is usually all white men.”

Her suggestion: “One way to change this is to look at external directors if board seats are available. As soon as the candidate group opens, the Rooney rule, which includes women and people of color in the candidate, can be applied. club. “

Some big institutional LPs, however, do not want to be called “troublemakers” and start a breakdown.

This allocation to top quartile funds is the most important benchmark for many employees in these large LP entities. Research linking diversity to higher financial performance and value creation has made little difference, so recent successes: only 15% of IPO initiatives, for example, January through June 2019, led by women.

So it seems that LPs need to ask themselves if their invested funds are better positioned to identify the full range of opportunities with undifferentiated GP groups investing in people like them, especially when there is a large underutilized market for investing in a variety of founders. .

But the top institutional LPs have market power. a female LP (who did not want to be identified) told me: “Top VCs will not let go of top LPs that easily. Their brand is based on some opinions on some LPs and they are proud to present it.”

Stardust Equity’s Hasselmann is skeptical about why many LPs feel they can’t change things right away, but he understands the relatively slow movement of large LPs.

“I don’t really know why they should not be pressured (…) certainly, in the larger institutions, it is more difficult for them to justify not allocating a ceiling based on gender inequality (…) first and foremost. a financial liability. However, the definition of confidential liability also extends. “

Slowly and steadily

Women like Hasselmann and Laurent-Ottomane continue to offer solutions for longer-term changes, while providing best practice solutions for other LPs and the alternative asset industry as a whole.

The change is already coming from smaller, younger and more private limited partners as they push for female representation and are reluctant to invest in all white MS teams. However, it will take some time for all the major developers of the agenda to be happy to publicly participate in this debate and move.

There is still much to be done – today only 11% of VC partners in the US they are women and only 13% in the UK – but LPs are slowly shifting their influence.

Article The role of limited partners in investing well-being by Johannes Lenhard first appeared on Crunchbase News.