The universe of woman and minority-owned private equity and venture capital firms closed out the decade with another record year of growth. At nearly 400 firms, this group is larger than ever, and 2019 marked yet another record number of firms raising capital, with nearly 200 funds in market. With this growth has come increased complexity as market dynamics have resulted in new firm formation in often-overlooked areas of the private markets. Woman and minority-owned firms remain well positioned to succeed, in part due to this differentiation. Despite the growing opportunity set, institutional investors remain slow to invest capital with diverse firms, due to a number of factors, including continued misconceptions, biases and lack of information. A deliberate, programmatic approach remains one of the best ways to invest successfully with diverse managers.
The criteria for classifying a private equity firm as woman and/or minority-owned often varies. In this market review, we only consider institutional quality private equity and venture capital firms that are majority owned (>50%) by women and/or ethnic minorities.* The firms must be based in, and primarily investing in, the United States.
Fairview remains dedicated to identifying and investing with the best performing managers in the private markets, inclusive of diverse managers. As one of the most active investors with diverse managers since 1994, Fairview is confident it sees virtually every institutional quality woman and minority-owned firm in the market every year and has established one of the best data sets in the industry. Key takeaways from this past year’s data that will be covered in this report include:
- The universe of woman and minority-owned firms continues to grow rapidly
- The vast majority of diverse managers are raising small funds through newer firms
- New diverse firm formation activity is most significant in venture capital
- Investing in diverse managers has a natural diverse multiplier effect at the portfolio company level
- Woman and minority-owned firms continue to remain below the radar of most institutional investors and are underrepresented in their portfolios
The Universe of Woman and Minority-Owned Firms Continues to Grow Rapidly
The market supply of woman and minority-owned private equity and venture capital firms rose to 394 at the end of 2019, up from 312 at the end of 2018. Since 2014, this group has grown at a compound annual growth rate of 29%. The growth implies a high rate of new firm formation by women and minorities. Fairview estimates 98 new firms were raising capital during the year. This is a continuation of a long-term trend of new firm formation by women and minorities. As experienced diverse talent increases in the industry, we are seeing more managers spinning out of tenured firms and launching new firms. We have also observed numerous talented professionals with relevant industry experience make a shift into private equity. In particular, this past year we have witnessed a rise in women, including minority women, launching new firms, predominantly in venture capital.
In 2019, 185 woman and minority-owned firms were actively raising capital in the market, a new record and up 41% from the 131 firms in the market in 2018. These firms represented less than 10% of all private equity firms in the market. Diverse managers represent a small relative proportion of the private equity market but continue to grow significantly on an absolute basis and represent a larger proportion of new firms in the industry. There are more opportunities for institutional investors to invest with diverse managers than ever before, and the return potential is significant as many of these managers are employing novel and differentiated strategies through unique, well-positioned platforms.
The Vast Majority of Diverse Managers are Raising Small Funds through Newer Firms
This past year, we observed an acceleration of new firm formation as experienced women and minorities launched firms at a record pace. The majority of the opportunity set over the past six years has been comprised of first-time funds being raised by new firms. In 2019, 53% of woman and minority-owned firms in the market were raising first-time funds.
For the third consecutive year, firms raising second-time funds represented more than 25% of the opportunity set in 2019. These are firms reentering the market after successfully deploying a first-time fund. Typically, these firms are seeking to broaden their institutional limited partner base. Despite a preponderance of young firms, the majority of woman and minority-owned firms in the market feature experienced investors with track records developed at larger, more well-established firms. Many woman and minority-owned firms have established themselves as leaders in their respective categories within tenured private equity and venture capital firms and many more are poised to follow suit.
Expected fund sizes for most woman and minority-owned funds generally correlate to fund sequence and strategy, reflective of trends in the broader private equity and venture capital market. However, fund sizes are typically smaller than average. The average target fund size for woman and minority-owned firms in 2019 was $172 million, slightly down from $177 million in 2018. The median target fund size for woman and minority-owned firms has been $100 million for the past two years.
The broader private equity industry featured an average target fund size of over $259 million in 2019. Noteworthy is that capital concentration remains elevated – funds of $1 billion or more secured 52% of capital raised in the first three quarters of 2019, a category where woman and minority-owned firms are the most significantly underrepresented. Again, part of the disparity in average fund size can be explained by the fact that the majority of woman and minority-owned firms are raising first-time funds which are typically smaller than average. Also, within the buyout segment, there are very few women or minorities leading large and mega buyout firms – whose funds drive up the overall industry average. Smaller than average fund sizes also explain why diverse managers are often below the radar of many institutional investors and their consultants.
New Diverse Firm Formation Activity is Most Significant in Venture Capital
We have observed the most growth in woman and minority-owned firms that pursue venture capital strategies. In fact, 69% of woman and minority-owned private equity funds in the market in 2019 were pursuing venture capital investments. This figure is up from 62% in 2018 – a trend buoyed by high firm formation. Venture capital funds are typically smaller (most seed and early-stage strategies can be executed with funds smaller than $150 million), which make them less daunting to raise for newer firms.
The subgroups of woman and minority-owned firms were nearly evenly split with women representing 48% of the funds in the venture capital market with the remainder attributed to male minority-owned firms. The number of woman-owned venture capital firms has been a particularly strong area of growth. This is against a backdrop of activism and advocacy for gender equality across multiple dimensions in the technology and venture capital industries. Experienced women finding it difficult to obtain senior positions with tenured firms and those with novel investment approaches are increasingly launching new firms. This is particularly evident at the seed and early stage.
One emerging trend is the rising number of diverse woman-owned firms. Of the 61 total woman-owned venture capital firms in the market in 2019, 30% were diverse woman-led and the remainder were led by Caucasian women. For the first time ever, there were more than 10 African-American and Hispanic woman-led firms in the market. From a fund size perspective, nearly all diverse woman-led firms were targeting fund sizes less than $150 million. From a stage perspective, nearly all were early stage funds (inclusive of seed).
Fewer strides are being made by women and minorities in the buyout and growth equity categories. On a relative basis, the universe of woman and minority-led growth equity and buyout funds has experienced a long-term decline due to growth in the venture capital category. However, on an absolute basis, the number of woman and minority-owned growth equity funds increased by 67% from 2018 to 2019 while the number of buyout funds remained unchanged over the same period.
Investing in Diverse Managers Has a Natural Diverse Multiplier Effect at the Portfolio Company Level
As one of the most experienced firms in building portfolios of emerging and diverse managers, Fairview has amassed a unique set of data on these managers and their portfolio companies. In three recent Fairview-managed funds-of-funds focused exclusively on investing in funds sponsored by woman and minority-owned private equity and venture capital firms, Fairview observes a natural diverse multiplier effect at the portfolio company level. In one example, 40% of the underlying 650+ portfolio companies featured women or minority executives. In another example, 31% of 125+ portfolio companies featured woman or minority executives. In a third portfolio, 58% of the nearly 100 portfolio companies in the program featured woman or minority executives.
Perhaps most striking is that none of these Fairview vehicles, nor the sub-funds in the vehicles have an explicit strategy of investing in woman and diverse entrepreneurs. Organically, these managers are tapping into their differentiated networks and are either explicitly or implicitly presenting themselves to entrepreneurs as less biased and relatable. The results lead to differentiated deal flow, more access to next generation entrepreneurs, and attractive deals and valuations given the proprietary nature of some of these opportunities. Performance benefits from this dynamic. Fairview’s next generation funds focused on emerging and diverse managers consistently outperform and have been highly additive to our clients’ private equity performance.
Woman and Minority-Owned Firms Continue to Remain Below the Radar of Most Institutional Investors and are Underrepresented in Their Portfolios
The woman and minority-owned segment of the private equity and venture capital market continued to expand at a high rate in 2019. New firm formation among woman and minority-owned firms continues to accelerate as experienced women and minorities leverage their networks and expertise accumulated throughout their careers. The universe is likely to continue to expand for the foreseeable future as woman and minority managers find themselves in leadership positions at tenured firms and continue to launch their own firms.
Despite the continued expansion of the universe and efforts by some institutional investors to be more inclusive of diverse managers, the bulk of these firms remain below the radar of most institutional investors and their consultants. Among the major challenges are misconceptions around risk, incumbency bias and assumptions of sub-optimal performance. Further, deficiencies in market intelligence, data, deal flow and access are challenges – in particular because diverse managers tend to be newer, raise smaller funds, have non-traditional approaches to fundraising and often pursue venture capital strategies.
Newer woman and minority-owned firms often feature different networks, relationships and approaches than established firms. In an industry that is characterized by change, we find that these differentiating factors can represent significant competitive advantages in sourcing, conducting due diligence, securing financing, making operating enhancements and exiting – perhaps now more than any other time in history. Further, many of the new firms are also more reflective of, and relatable to, the entrepreneurs and markets in which they invest, which are now also changing rapidly. Fairview is confident that opportunities to invest with high-quality woman and minority managers will continue to be plentiful and rewarding for institutional investors who take a deliberate and programmatic approach to deploying capital in the category.
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* Defined by the U.S. Census Bureau as American Indian or Alaska Native, Asian American, Black or African American, Hispanic or Latino, and Native Hawaiian or Other Pacific Islander.
 Fairview Capital analysis and Preqin Q3 2019 Private Capital Fundraising Update
 2019 average excludes one major statistical outlier.
 Fairview Capital data and Preqin Q3 2019 Private Capital Fundraising Update