Future Returns: GEM’s Approach to Investing for Equity

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The staff at Global Endowment Management (GEM) realized in 2017 that their intention to invest for racial and social equity on behalf of clients wasn’t driving the desired results. 

At the time, GEM—an outsourced chief investment office that manages about US$11 billion for college endowments and mission-drive private foundations—had been integrating environmental, social, and governance (ESG) criteria across its investment options in public and private markets, and across asset classes, since 2012, says Meredith Heimburger, director of impact at the Charlotte, N.C.-based firm. 

“We didn’t think we had met our high bar for achieving more equity and diversity,” Heimburger says. 

That realization began a yearlong process that led to the appointment of a director of diversity and inclusion advocacy who drives those priorities throughout the firm—from recruitment and human resources, to community outreach, to portfolio management. 

Penta recently spoke with Heimburger about how GEM shifted its approach to selecting investments and about specific investment choices. 

Diversifying the Manager Pipeline

By 2018, GEM began a focused effort to seek out new investment managers. It was facing a difficult reality, however: Only 1.1% of about US$72 trillion in assets under management across the U.S. investment industry is managed by women and people of color, according to a 2017 study by the Miami-based Knight Foundation. 

Yet the firm spent a year sourcing, networking, joining new organizations, and “putting the word out that we were interested in taking calls from firms we may not have taken calls from [before],” Heimburger says. The effort led to a tenfold increase in the diversity of the GEM’s managers.

But GEM’s staff also began to recognize that there was a difference between diversity and equity, “not only in our portfolio, but in how we were working with and talking to our clients,” Heimburger says. 

To go beyond diversity metrics to consider the role of racial and social equity, Heimburger and her colleagues spent another year researching racial and social equity in the investment industry “focusing on how capital is allocated and who reaps the rewards,” she says.

The result was an equity-lens framework that it now applies to its managers. Today, about 25% of the firm’s investments contribute to racial and social equity, and 36% are diverse, meaning GEM invests in firms led by women and people of color. 

A Second Look 

Among GEM’s practices now is to give funds led by diverse managers a second look by a principal or partner of the firm before they can be turned down. Sometimes managers are turned down simply because 1,000 are evaluated by analysts each year for only 10-15 openings across all client portfolios, Heimburger says. 

“We have to have decisive analysts who are willing to say no,” she says. But the “second look” process has led to a broader firm-wide education on the potential for bias. 

“What we learned was first of all, given the history in our industry, it’s worth it to take the extra time on diverse managers,” Heimburger says. “Second, the value of knowing someone in a network, or having someone to vouch for you, is powerful in the investment industry. We had to stress-test our own processes and see where there were areas where we were passing up managers who should get a second look.”

Turning to Private Markets 

GEM applies its racial and social equity lens to all its investments, but it finds more candidates among private-market investments versus public. It’s a strategy that works for its clients who have a “significant allocation to private markets and alternatives,” Heimburger says. 

An example of one of these investments is Precursor Ventures, a San Francisco-based early-stage venture capital firm founded by Charles Hudson. The firm, which is led by a predominately Black team, has invested 53% of assets in businesses led by female entrepreneurs and more than 50% in those led by people of color, according to GEM. 

Precursor is an example of a fund looking to improve the lives of those affected by the companies it invests in. 

But investors benefit as well as Precursor views diversity and equity “as a form of alpha,” Heimburger says. “They are investing in differentiated opportunities that Silicon Valley is typically overlooking.”

That is also true for BBG (BBGV), a New York-based venture capital fund co-founded by Susan Lyne and Nisha Dua, that is focused exclusively on early-stage women-led and women co-led businesses. BBGV’s investments are focused on health and well-being, the future of education and work, climate-friendly products, and emerging consumers, Heimburger says. 

They look at issues that women most often are solving, and invest in the entrepreneurs “who are solving them on the ground,” she says. 

Another firm GEM invests in is Base10 Partners, a San Francisco-based venture  firm co-founded by Adaeyemi Ajao, an entrepreneur and investor who, among other things, was the co-founder and CEO of Tuenti, known as the Spanish Facebook, until it was sold to Telefonica in 2010. 

Base10 focuses on “automation for the real economy,” specifically aiming to provide capital for tech firms led by founders solving problems for the 99%, according to the firm’s website. Base10 gives a portion of profits to scholarships for underrepresented students, and in May, it raised a US$250 million fund that will direct a portion of profits to historically Black college and universities (HBCUs).