As institutional investors turn to private markets, they are seeking to address systemic imbalances by increasingly focusing on diversity & inclusion (D&I), according to Mercer.
Mercer said that protests against racial violence and injustice around the world have put a spotlight on inequality, accelerating the demand for far-reaching social, political and corporate transformation.
As a result, it added, organisations are becoming more focused on the need to address D&I issues, including implementing D&I manager programs and expanding due diligence frameworks to include diversity metrics.
Mercer said that evidence supporting the positive impact D&I has on private market performance is also mounting, and has produced a white paper, The Power of Change: The what, why and how of creating a diverse private market portfolio, examining why incorporating D&I into private market portfolios could result in performance that outperforms benchmarks.
For example, it said, recent research suggests diverse teams make better decisions and are less likely to be influenced by unconscious biases. A 2019 study conducted by the National Association of Investment Companies (NAIC) found that, from 1994 to 2018, diverse funds outperformed the top quartile benchmark on a net IRR basis, and outperformed the benchmark median quartile on a Total Value to Paid In Capital and a Distributions to Paid In Capital basis.
“The pandemic and growing demand for social change, coupled with market volatility, have made investors realise that change is here,” said Raelan Lambert, global alternatives leader, Mercer.
Lambert said there are many benefits to embracing D&I, as well as risk mitigation considerations, and that by creating a private markets D&I investment program, institutional investors can send a strong signal to asset managers that diversity is a priority.
“We are working with managers and asset owners to help them transform investment management through their portfolio investment choices… by increasing the diversity of their managers, investors can create an environment where new ideas can thrive. This environment enables fresh perspectives and different networks through which to access potential new deal flow.”