due diligence
2.0

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 over $80 trillion in assets under management.(1)

Given society’s pressing need to reduce systemic racial inequities in education, hiring, compensation, promotion, healthcare, environmental pollution, and mass incarceration, among many others, the asset owner’s and advisor’s most impactful potential contribution is to allocate more capital to BIPOC (Black, Indigenous, and people of color) managers, communities, entrepreneurs, and stakeholders. Furthermore, by not actively allocating to BIPOC managers, there may be a loss of potential financial returns. (2) Fiduciaries are expected to act with prudence, which means “acting with or showing care and thought for the future” (3) and “in the best interests of their clients(4).” Creating a substantially equivalent, but alternative due-diligence process that increases the flow of capital to BIPOC managers is consistent with the fiduciary responsibility of our organizations.

BIPOC asset managers consistently state that existing financial industry due diligence standards result in institutional assets continuing to be managed by the same firms, which are overwhelmingly white.(5) While asset allocators may have initial conversations with many BIPOC managers, they are notably missing from institutional portfolios. Often BIPOC managers are eliminated from the selection pool based on historical industry standards for due diligence that reinforce existing social inequities.

To catalyze movement of capital to BIPOC managers, the undersigned asset owners, consultants, and financial intermediaries, on behalf of asset owners who value BIPOC manager inclusion, commit to making the following shifts in our due diligence processes:

1. Consider Track Record Alternatives
   For newer strategies or products, instead of insisting on a specific minimum track record for the product, we will evaluate members of the investment and leadership team based on past experience, investment sourcing capabilities, domain expertise, as well as assess prior track records in related or relevant work, possibly including redacted representative separate account performance rather than requiring cost-prohibitive third-party assessments, as well as each individual’s role in achieving previous results. To the extent the manager is using partner firms to complement their skillsets, the relevant experience and track records of said partners will be evaluated.

2. Expand What it Means to Work Together
   Knowing that opportunities for individual investment managers to “work together” or “invest together” at existing asset management firms are few and far between for BIPOC managers, we will take into consideration the time individual investment managers have worked together while building the firm and in other organizations as substitutes to evaluate the stability of the partnership.

3. Reassess Assets Under Management as a Risk Metric
   Instead of using manager assets under management as a proxy for the financial stability of a manager, we commit to evaluating a) the manager’s history of operating effectively with lower than industry-standard budgets, b) growth momentum in assets under management (AUM), c) AUM growth in previous position(s) at prior firm(s), and d) what happens to the underlying investments in the event of firm insolvency.

4. Respect BIPOC Time
   Reports from BIPOC managers conclude that while they have committed extensive time to due diligence conversations and formulating written responses to questions, very little capital has actually moved. Recognizing that time is the most precious commodity for BIPOC managers attempting to create financial products that address society’s most intractable challenges, we will minimize requests for meeting time with managers and, if possible, convene group meetings in which managers can answer questions for multiple asset allocators at once. In addition, to relieve the often onerous time burden associated with submitting RFIs and RFPs, we will condense, standardize, and/or support managers in completing these documents.

5. Contextualize Fees
   Rather than eliminating BIPOC managers due to higher fees, we will compare the services being provided to peer managers (e.g., Does the BIPOC manager require more staff or outsourced partnerships to collect data from impacted communities?). Additionally, because higher fees are often correlated with lower assets under management, we commit to working with BIPOC managers to allow for initial high fees predicated on a manager projection for future fee reductions tied to fundraising success.

6. Include Historically Unrecognized Risks
   To the extent we consider market inefficiencies or underpriced risks in our investment philosophy, we will endeavor to evaluate the potential risks and costs of BIPOC under-capitalization in our analysis. This could include the costs of social unrest, climate migration, sickness and productivity losses, and reduced government revenues from economic underperformance, among others.

7. Be Willing to Go First
   We will consider being an anchor/seed investor or part of a first close (or in the case of a mutual fund or exchange-traded fund, at/near fund inception) rather than insisting on being in later closes. This contributes to fundraising momentum, and we agree to not require special terms such as lower fees in order to take this position.

8. Offer Transparency about Remaining Hurdles
   If after the aforementioned revisions to our due diligence process we still have specific minimum thresholds or deal-breakers, we will explicitly state these at the outset when circulating RFPs or RFIs to BIPOC managers.  This way, if the manager finds them overly burdensome, they have the opportunity to invest their time in other capital raising opportunities.

9. Provide Detailed Feedback
   If we choose not to invest with a BIPOC manager who has engaged in our alternative due diligence process, given our commitment to mutual learning, we will provide clear, specific, and timely feedback regarding the reasons for rejection.

It is our sincere intention that these alternative means of evaluating BIPOC managers will contribute to advancing the investment management industry’s allocation of capital towards parity with national demographic representation.

(Endnotes below)