There’s 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! 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 data to show the changes are working.
The Kresge Foundation was started in 1924 by Sebastian Kresge, who started the department store chain that became Kmart. Before making 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 Barker, chief investment officer of the Kresge Foundation. “Through luck and skill, we’ve grown our endowment to just over $4 billion.”
2005 was an important year. Ripson comes on board as president and CEO. The foundation has transitioned from making philanthropic capital investments that primarily fund higher education institution buildings to grants to nonprofits that serve low-income people living in American cities. The foundation focuses on healthcare, education, human services, environment and culture. It donates about $150 – $165 million per year.
The foundation function has begun to take steps to change how it manages its investments from outsourcing to in-sourcing. First, the board appointed two non-trustee investment committee members to help them think through whether and how to outsource. It was decided to create an internal investment team, which now numbers 14. Barker was hired in 2007 and became Chief Investment Officer (CIO) in 2022.
The internal team has changed how it allocates capital. “Options are a big part of our book, about 40%,” says Barker. Based on performance over the past five years, venture capital has increased from 10% to 17%, and the team is working to bring it back to 10% in the current environment.
Kresge Foundation’s investment team partners with the funds it invests in and prefers to be called upon when the fund makes important decisions. “We look for partnership-minded people,” says Barker. They invest in funds that emphasize performance over management fees and want to help their investments do well. “If the fund does well, it makes a lot of money and we make a lot of money,” he said.
“With a mission to expand opportunity in American cities, we’ve seen that expanding opportunity often involves breaking down barriers,” Barker said, especially barriers that block the path to equality. In 2017, Rapson encouraged all functional areas to look within their sectors and identify what barriers are preventing progress.
During that time, Knight Foundation research found that women and minorities managed 1.1% of the $71. 4 trillion under US-based asset management. New research shows that the numbers remain mostly the same: 1.4% of the $82.2 trillion in US-based assets are managed by diversified holdings. Women and people of color represent 70% of the US population. Diverse holdings of mutual, hedge, private equity and real estate funds are severely underrepresented.
Discrimination makes no sense. There is no performance explanation for why so few female, black, and Latinx managers are undercapitalized. There are stacks of research that show diversity improves performance. “We had the opportunity to improve returns by identifying and partnering with the best diversified proprietary firms across all asset classes,” Barker said.
In 2019, the Kresge Foundation pledged that by 2025, 25% of its US assets under management would be invested in women- and diverse-owned companies. They are also diversifying their teams and championing DEI initiatives within the industry as part of their people, portfolio and pulpit strategies.
By law, foundations are limited to representing a small percentage of a fund. Many endowments have a minimum check size that they write because it is too labor intensive for them to manage very small investments. It takes time to develop and execute due diligence practices to evaluate small, emerging-manager funds that lack the traditional multi-year track record they seek.
However, those who do the research feel that it is worth their time. Cambridge Associates did just that. The investment portfolio management and advisory company serving pensions, endowments and family offices, has recorded better returns over the years. It plans to increase investments in women- and minority-owned money-management firms to about $82 billion over the next two years, representing 15% of its $548 billion in assets under advisement.
The Kresge Foundation is another that has realized the benefits of investing in less traditional funds. Investing in small funds takes time and has invested in $10 million venture capital funds.
In 2020, Kresge partnered with the MacArthur Foundation and Lennox Park Solutions to develop a standardized demographic survey to send to their investment managers, to reduce the burden of surveying limited partners. “We have encouraged many of our peers, other large foundations, to adopt similar standardized [survey] Because all of our managers are diving into different surveys,” Barker said. “We started having conversations with them about what we learned about making different teams better. [than non-diverse ones] Decisions and how they can change how they’re sourcing talent.
“When you start measuring something, you see improvement,” Barker declares.
Pursuit of alpha by investing in different fund managers, a report published last September blamed the Kresge Foundation for its commitment to invest 25% of its assets in various proprietary funds. Currently, 20% or $360 million is invested with various proprietary companies. When benchmarked against 30 participating foundations, Kresge ranked 13th. The report shares Kresge’s strategies for managing investment funds and the underrepresentation of women and people of color in his team.
Diversity, Equity and Inclusion (DEI) is not just the right thing to do. It is a more profitable thing.
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