Institutional investors push for greater diversity, equity and inclusion - Mercer

Written by Adam Cadle

24/02/2021

Institutional investors are pushing for greater diversity, equity and inclusion (DEI) within their investments in private markets, a new white paper by Mercer has found.

Its white paper, The Power of Change: The what, why and how of creating a diverse private markets portfolio, found that the recent 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, organisations are becoming more focused on the need to address DEI, with institutional investors seeking to address systemic imbalances by increasing diversity within their organisations and boosting DEI with their investment portfolios. This includes implementing DEI manager programs and expanding due diligence frameworks to include diversity metrics.

Mercer said that evidence supporting the positive impact DEI has on private market performance is mounting. Its white paper addresses why incorporating DEI into private market portfolios could result in performance that outperforms benchmarks.

For example, 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.

Commenting, Mercer global alternative leader, Raelan Lambert, said: “The pandemic and growing demand for social change, coupled with market volatility, have made investors realise that change is here. There are many benefits to embracing DEI, as well as risk mitigation considerations. By creating a private markets DEI investment programme, 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.”

To develop and implement an effective DEI investment programme in private markets, it is essential to have a clear, consistent and quantifiable definition of what the term means in investment practice. Criteria that Mercer believes to have considerable influence on the success of a DEI program include fund manager ownership, investment team composition, investment committee composition, thresholds and alignment.

In Mercer’s view, the investment committee composition is the most meaningful criteria when evaluating the levels of DEI at a private markets fund manager, as this is typically where final investment decisions happen.

(This article first appeared on our sister title www.europeanpensions.net)

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