John A. Barker, Kresge Foundation vice president and chief investment officer
There is no doubt about it: If you're raising capital for your company or venture fund—especially if you're a woman or BIPOC—these are challenging times. Take heart there are counter forces at work! Some foundations are putting their money where their mouth is. The Kresge Foundation, which manages a $4 billion endowment, has changed how it invests and has the data to show the effectiveness of the changes.
The Kresge Foundation was started in 1924 by Sebastian Kresge, who began the chains of department stores that became Kmart. Before the Giving Pledge, Kresge left 90% of his net worth to the foundation.
"We've given away roughly $4 billion in our 99 years of existence," said John A. 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 making charitable capital investments that primarily fund buildings at higher education institutions to donations to nonprofits that serve low-income people living in American cities. The foundation focuses on healthcare, education, human services, the environment, and culture. It donates about $150 - $165 million per year.
The foundation also started to take steps to change how it manages its investments, from outsourcing the function to in-sourcing. First, the board recruited two non-trustee Investment Committee members to help them think if and how they would in-source. The decision was made to build an internal investment team, which now numbers 14. Barker was hired in 2007 and became the Chief Investment Officer (CIO) in 2022.
The internal team changed how it allocates capital. "Alternatives are a big piece of our book, roughly 40%," said Barker. Based on performance over the past five years, venture capital went from 10% to 17%, and the team is working to bring that back down to 10% in the current environment.
The investment team at the Kresge Foundation partners with the funds it invests in and likes to be called upon if the fund is making important decisions. "We look for people with a partnership mentality," said Barker. They invest in funds emphasizing performance over management fees and want to help their investment to do well. "If the fund does well, it makes a lot of money, and we make a lot of money," he said.
"With the mission of expanding opportunities in American cities, we found that expanding opportunities often involves dismantling barriers," said Barker, particularly barriers that impede pathways to equality. In 2017, Rapson encouraged all functional areas to look within their sector and identify what barriers hamper progress.
At the time, research by the Knight Foundation found that women- and minority- owned firms managed 1.1% of $71. 4 trillion of U.S.-based assets. Newer research finds that the numbers have mostly stayed the same: 1.4% of $82.2 trillion of U.S.-based assets is managed by diverse-owned firms. Women and people of color represent 70% of the U.S. population. Diverse ownership of mutual, hedge, private equity, and real estate funds is severely underrepresented.
The disparity makes no sense. There is no performance explanation for why so few women, Black, and Latinx managers are given so little capital. There are stacks of research that show diversity improves performance. "There was an opportunity for us to improve our returns by identifying and partnering with the best diverse-owned firms across all asset classes," said Barker.
In 2019, Kresge Foundation launch 25% by ’25”, which pledged that by 2025, 25% of its U.S. assets under management would be invested in female- and diverse-owned firms. They are also diversifying their team 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 a fund. Many endowments have a minimum check size that they write because managing many small investments is too work-intensive for them to do. It takes time to develop and execute the due diligence practices to evaluate small, emerging-manager funds that don't have the traditional multi-year track record that they look for.
However, those that do the research find it is well worth their time. Cambridge Associates has done so. The investment portfolio management and advisory company serving pensions, endowments, and family offices, has documented better returns for years. It plans to increase investments in money-management firms owned by women and minorities to about $82 billion over the next two years, representing 15% of its $548 billion of assets under advisement.
The Kresge Foundation is another that has realized the benefits of investing in less traditional funds. It takes the time to invest in small funds and has invested in a $10 million venture capital fund.
To reduce the burden over 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 peers, other large foundations, to adopt a similar standardized [survey] because all of our managers are getting inundated with different surveys," said Barker. "We started to have conversations with them [fund managers] about what we've learned about diverse teams making better [than non-diverse ones] decisions and how they can change how they're sourcing talent.
"When you start to measure something, you see improvement," declared Barker.
In Pursuit of Alpha by Investing in Diverse Fund Managers, a report published last September holds the Kresge Foundation accountable for its pledge to invest 25% of its assets in diverse-owned funds. Currently, 20% or $360 million are invested with diverse-owned firms. When benchmarked against the 30 participating foundations, Kresge ranked 13th. The report shares Kresge's strategies to counter the underrepresentation of women and people of color managing investments funds and on its team.
Diversity, equity, and inclusion (DEI) isn't just the right thing to do. It is the more profitable thing.
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