A Q&A with Erika Seth Davies

Collective co-founder Ruth Shaber, MD recently sat down with Advisory Board member Erika Seth Davies, CEO, RHIA Ventures to talk about the state of racial equity in investment management. 

RS: How does applying a racial equity lens to the investment process achieve better results?

ESD: Applying a racial equity lens to an investment strategy is a process of examining and dissolving the systemic barriers and biases that restrict people and communities of color from fully participating in capital markets. A racial equity lens provides investors with an advantage in recognizing overlooked talent and opportunities.

Investing 101 teaches us to diversify a portfolio to reduce risk and seek long term gains. An equally fundamental lesson is that diversity in the capital chain is a hedge against risk and can support achieving good return on investment. 

Studies have repeatedly demonstrated that funds managed by diverse and women-led asset managers tend to yield higher returns with less risk. Analysts have made the financial case for increased diversity among money managers time and again. Scholars, economists, advocates, and business leaders have, time and again, made the moral case for greater inclusion in our financial system and creating a prosperous economy that supports positive social impacts. 

And yet, the asset management industry’s prevailing policies, practices, and narratives perpetuate the false notion that working with money managers of color invites inherent risk, despite all data to the contrary. The standard assets under management benchmarks overwhelmingly favor large, established firms and screen out diverse funds and managers that can demonstrate financial stability by other metrics (e.g. operating history, AUM growth momentum, AUM growth in previous positions). Investors and investing institutions must intentionally confront and remove these entrenched barriers – if not for the moral imperative then out of fiduciary prudence. If we do not have high-performing, diverse and women-owned asset managers at the table we risk sacrificing higher returns.

.

RS: In 2023, less than 1% of venture funding went to Black-owned businesses. How do you reconcile that number given the amount of awareness about the need to support Black businesses in the investment community? 

ESD: Black entrepreneurs in the United States have historically faced obvious systemic barriers to accessing capital, not just in venture but traditional banking. Venture capital is an especially insular, relationship-based industry that favors founders with proximity to capital and generational wealth, putting Black and diverse innovators at significant disadvantage. Closing the gaps in funding opportunities for underestimated founders offers the promise of new talent and untapped markets. Black-owned businesses are not a monolith; they represent vast potential for business growth, market expansion, innovation, and scalability.

Acknowledging the racial disparities in venture is one step. The challenge of shifting the status quo in a heavily relationship-based, exclusionary industry is real. Angel investors, general partners, limited partners, and investment groups can choose to be intentionally inclusive. Opportunities for early-stage capital are especially critical for BIPOC innovators. There is a wealth of industry leaders, memberships, resources, tools, and events available to investors seeking to better align their investment strategies with their values. (See resources listed below as a starting point.)

.

RS: Tell us about your work with The REAL and how institutions can center a racial equity lens in their investment decision-making.

ESD: It’s important to acknowledge that historically marginalized groups have been prevented from accessing opportunities and intentionally kept from decision-making roles or informing key strategies even when those approaches would directly impact them. Undertaking an adaptive change like increasing diversity among asset managers includes bringing those who are closest to the problem into the process of developing solutions.

The Racial Equity Asset Lab (The REAL) addresses the root causes of disparities in access, opportunity, and prosperity in our society: racism and capitalism. By challenging the policies, practices, and cultural representations perpetuating these systems we can bring justice to capital and promote shared, widespread prosperity. We use The REAL framework to evaluate organizational and investment processes under ten features and across a four-stage continuum from color-blind to equity-focused. The framework sets a baseline for activities and guides planning and implementation to advance racial equity. A philanthropic foundation or university, for example, can apply The REAL to bring their endowment investment strategy in alignment with their mission and guiding principles.

Due Diligence 2.0 is another tool for investors and investment institutions. It offers a due diligence upgrade. Traditional due diligence and risk assessment frameworks in the asset management industry have led to a system in which white male asset managers control 98.6% of the investment industry’s $80 trillion in assets under management. Due Diligence 2.0 offers an equivalent, but alternative, due diligence process that increases the flow of capital to BIPOC managers as consistent with the fiduciary responsibility of investment organizations. More than 100 asset owners, consultants, and financial intermediaries have embraced this due diligence innovation.

The racial reckoning of 2020 moved businesses and institutions to consider racial and gender diversity among their leadership, workforce, and partners – it would seem intuitive then to consider diversity concerning the management of assets. Overcoming the biases that screen out high-performing diverse fund managers and firms must be intentional, but the available tools and frameworks mean the process need not be daunting. The real risk is in failing to diversify, not only in our portfolios but in the talent allocating assets and managing the portfolios. Failing to do so may come at the expense of higher returns.

In addition to Diverse Investing Collective, the following organizations offer relevant resources:

• Diverse Manager Directory – A directory housed by Emerging Manager Monthly of top BIPOC, women, veteran and disabled-owned firms.
• Consortium Diverse + Emerging Manager Conference – A gathering that educates institutional investors and consultants on best practices of allocating to emerging and diverse managers, and that helps those managers grow their businesses. 
• Black Women in Asset Management (BWAM) – Organization that champions the positive impact of Black women who work in asset management and provides the tools that will enable them to thrive.
• National Association of Securities Professionals (NASP) – Organization that helps BIPOC and women professionals and firms achieve inclusion in the financial services industry. 
• National Association of Investment Companies (NAIC) – The largest network of diverse-owned alternative investment firms.
• New America Alliance (NAA) – Organization dedicated to advancing the economic development of the American Latino/a community.
• Association of Asian American Investment Managers (AAIM) – Organization dedicated to increasing diversity and inclusion in the investment management industry, serving as a voice for the Asian American and Pacific Islander (AAPI) community.
• Diverse Asset Managers Initiative – A consortium committed to raising awareness among institutional investors about the benefits of investing funds with diverse-owned asset management firms.