There’s no doubt about it: if you’re raising capital to fund your company or venture—especially if you’re a woman or BIPOC—it’s a challenging time. Take heart! Some foundations have put their money where their mouth is. The Kresge Foundation, which manages a $4 billion endowment, has data to show how it invests and the effectiveness of changes.

The Kresge Foundation was started in 1924 by Sebastian Kresge, who started the chain of department stores that became Kmart. Before the Giving Pledge, Kresge left 90% of his net worth to the foundation.

“We’ve given away nearly $4 billion in our 99 years of existence,” said John Barker, chief investment officer of the Kresge Foundation. “Through luck and skill, we grew our endowment to just over $4 billion.”

2005 was a pivotal year. Rip Rapson came on board as president and CEO. The foundation transitioned from philanthropic capital investments primarily donating buildings to institutions of higher education to nonprofits serving low-income people living in American cities. The foundation focuses on healthcare, education, human services, the environment, and culture. It donates $150 – $165 million per year.

The foundation began to take steps to change the way it managed its investments, from outsourcing to in-sourcing the function. First, the board appointed two non-fiduciary investment committee members to help them think through whether and how to outsource. It was decided to build an internal investment team, which now numbers 14. Barker was hired in 2007 and became chief investment officer (CIO) in 2022.

The internal team changed the way capital was allocated. “Alternatives are a big chunk of our book, about 40%,” Barker said. Based on performance over the past five years, venture capital has gone from 10% to 17%, and the team is working to bring it back to 10% in the current environment.

The investment team at the Kresge Foundation partners with the funds it invests in and likes to call if the fund is making important decisions. “We look for people with a partnership mindset,” Barker said. They invest in funds that emphasize performance over management fees and want to help their investments outperform. “If the fund does well, it makes more money, and we make more money,” he said.

“With a mission to expand opportunity in American cities, we’ve found that expanding opportunity often involves removing barriers,” Barker said, particularly barriers that stand in the way of equality. In 2017, Rapson encouraged all functional areas to look within their area and identify what barriers are impeding progress.

At the time, research by the Knight Foundation found that women and minorities managed 1.1% of the $71. 4 trillion in US-based assets under management. New research finds that the numbers remain mostly the same: 1.4% of the $82.2 trillion in US-based assets are managed by diversified-ownership firms. Women and people of color represent 70% of the US population. Diversified ownership of mutual, hedge, private equity, and real estate funds is heavily featured.

Inequality makes no sense. There is no performance explanation for why so few female, black, and Latinx managers are given so little capital. There are stacks of research showing that diversity improves performance. “We had an opportunity to improve our returns by identifying and partnering with the best diversified-ownership firms across all asset classes,” Barker said.

In 2019, the Kresge Foundation pledged to invest 25% of its US assets under management in women- and diverse-owned firms by 2025. They are diversifying their teams and championing DEI initiatives within the industry as part of their people, portfolio, and pulpit strategy.

By law, foundations are limited to representing a small percentage of funds. Many funds have a minimum check size that they write because it is too labor-intensive for them to manage very small investments. It takes time to develop and implement due diligence practices to evaluate small, emerging-manager funds that lack the traditional multi-year track record they seek.

However, those who do research find it worth their while. Cambridge Associates has done it. The investment portfolio management and advisory company serving pensions, endowments, and family offices has documented good returns for years. It plans to increase investments in money management firms owned by women and minorities over the next two years, representing 15% of the $548 billion in assets under advisement.

The Kresge Foundation is another that has realized the benefits of investing in less traditional funds. It takes time to invest in smaller funds and has invested in a $10 million venture capital fund.

To reduce the burden of taking surveys from limited partners, in 2020, Kresge partnered with the MacArthur Foundation and Lenox Park Solutions to create a standardized demographic survey sent to their investment managers. “We encouraged many of our friends, other large foundations, to adopt the same standard [survey] Because all of our managers are immersed in different surveys,” Barker said. “We started talking to them about what we learned about how to make different teams better. [than non-diverse ones] Decisions and how they are sourcing talent can change.

“When you start measuring something, you see improvement,” Barker declared.

In search of alpha by investing in diversified fund managers, a report published last September blames the Craig Foundation for its commitment to invest 25% of its assets in diversified proprietary funds. Currently, 20% or $360 million is invested with different ownership firms. When benchmarked against 30 participating foundations, Kresge ranked 13th. The report shares Kresge’s strategies to address the underrepresentation of women and people of color managing investment funds and its teams.

Diversity, Equity, and Inclusion (DEI) is more than just the right thing to do. This is more beneficial.

How are you improving your firm’s diversity?

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