Racial Diversity in Private Capital Fundraising

Innovation and Economic Growth

Article Snapshot


Johan Cassel, Josh Lerner and Emmanuel Yimfor


Working Paper, 2021


Black and Hispanic-owned funds find it harder to attract investors than one would expect, given that such funds perform as well as other funds. Data shows this is due to investors’ lower demand for diverse fund managers.

Policy Relevance

“Emerging manager” programs may not be effective in addressing racial disparities in access to capital.

Main Points

  • Asset management companies include venture capital groups, buyout groups, and growth investment groups; such private capital groups provide wealth for their owners and catalyze economic growth.
  • The total share of assets under management by minority-owned financial groups in the United States is less than 1.6 percent, although minorities comprise 40 percent of the population.
  • This imbalance is importance is important for two reasons:
    • Ownership of private capital groups drives wealth creation.
    • The racial composition of funds could be a barrier to funding for minority-owned businesses, because private capital groups tend to fund entrepreneurs that share characteristics with the fund owners ("homophily").
  • Some suggest that the imbalance is caused by a shortage of qualified minority fund managers; an alternative explanation is that the problem stems from low investor demand for minority managers, and the data supports this latter explanation.
  • “Emerging manager” programs earmark a small portion of capital for management by emerging managers, usually women or minorities.
    • Some note that such programs are dominated by funds managed by white women.
    • Emerging managers may be pigeon-holed and struggle to move on to managing traditional investments.
  • Black and Hispanic-owned groups are less likely to meet fundraising goals, attract fewer investors, and raise smaller funds; however, overall, minority-owned funds perform as well as non-minority-owned funds.
  • Investors often find non-minority-owned funds’ past successes persuasive in choosing to make follow-on investments; however, for Black and Hispanic-owned funds, investors are less responsive to the firms’ past success.
  • In times of increased racial awareness, such as the aftermath of the George Floyd killing, investors are more willing to invest in minority-owned funds that have performed well in the past; investors’ sensitivity to funds’ past performance becomes the same as for non-minority-owned funds.
  • In some states, public pension funds often partner with private capital funds.
    • In these states, the pattern of investment in minority and non-minority funds is more similar.
    • In making investments, public pension funds often consider factors other than performance, such as economic development.

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