Gender Lens as a Winning Strategy in Impact Investing
Within the impact investing community, the value of gender diversity as an investment evaluation screen is rarely questioned because we know a secret that mainstream private equity and venture capital investors have failed to identify. What’s that? We’ve discovered that investing in women-led companies is not only exceptionally impactful, but it is also an excellent alpha strategy!
There is a substantial and growing body of research proving the business case for investing in women-led companies, women on boards, and women in the C-suite. Traditional investors clearly aren’t quite as quant and numbers-oriented as we give them credit for, because the data is in, and it’s clear that they’re leaving value on the table. When investors remain stuck in traditional mindsets, clinging to a disproven perception that women-led companies and funds yield “concessionary” sub-standard returns, they hand alpha to smart impact investors. With overwhelming evidence that investing in women delivers equally strong – and often stronger – returns that are undervalued by private equity and venture capital, the resulting market inefficiencies equate to trillions of dollars in untapped opportunity. In fact, in a 2018 report by Morgan Stanley they estimate that there is a $4.4 trillion missed market opportunity in investing in women and minority-owned businesses. With centuries of both money and power traditionally having been in the hands of white men who invest in what they recognize, mainstream capital has been slow to see the exceptional opportunity available to invest in funds and entrepreneurs underserved by those financial markets.
Similarly, historically family investment decision-making has been passed down between generations in a patriarchal pattern from father to eldest son or sons. However, this dynamic has shifted dramatically in recent years, with wealth now often passing first to the wife (who is often a few years younger and outlives her husband) before transitioning to the next generation. Why is this significant? While men have been better at compartmentalizing, separating finances from personal values and traditionally philanthropic endeavors, women are more synergistic, looking for opportunities that blend their financial goals and their values. As such, women are far more likely to seek out investments (both public and private) that deliver the superior returns that diversity yields while also aligning with their values including supporting overlooked women-led ventures. When wealth transfers intergenerationally from patriarch or matriarch to the next generation, both young men and young women are prioritizing an impact lens on their investments, so their investment theses are beginning to mirror each other more closely than in any prior generation.
Because millennials are among the early adopters of impact investing in general and including “gender lens” strategies more specifically, they have been among the first to realize that investing in women and diverse teams has outperformed across sectors, size, and stage of companies. Traditional institutions have begun to take notice. The Credit Suisse Research Institute in 2016 found that companies which prioritized women on boards and in senior management delivered higher average returns on equity, better average growth, and higher price-to-book value multiples. In addition, McKinsey’s 2018 Delivering Through Diversity report found a statistically significant correlation between greater diversity in leadership teams and financial outperformance, with companies in the top quartile of gender diverse executive teams, 21 percent more likely to outperform in profitability and 27 percent more likely to deliver superior value creation.
Outperformance is just as true in the private sector. For private equity and venture capital, BCG’s 2018 Why Women-Owned Startups Are a Better Bet reported that businesses founded by women ultimately deliver more than 2x the revenue per dollar invested than those founded by men, and a prominent seed-stage venture firm, First Round, found that teams with at least one female founder did 63 percent better than all-male founder teams over the life of their investments.
Given the abundant market research, it’s easy to see why impact investors increasingly seek investment funds that are explicitly filtered to include a gender lens approach, with diligence to ensure there is female leadership at the fund level as well as in the portfolio of investments the fund holds. For example, DigitalDx Ventures is a Silicon Valley healthtech fund that invests in companies developing non-invasive, low cost solutions for the early detection of large-scale diseases. Along with the fund itself being a majority-woman-owned fund, the portfolio companies DigitalDx invests in include medical and technology professionals who are women founders or whose companies have a significant number of women in their C-suite. As women entrepreneurs must often show a superior level of persistence and resilience to rise to a leadership position, this screen increases likelihood of entrepreneurial success, reducing investment risk.
The good news for DigitalDx and other funds and companies with a similar investment discipline is that, with proven gender investment statistics becoming more readily available, additional investment dollars are flowing to these opportunities from within the family office and institutional community. In fact, in 2018 US SIF research found that institutional investors considered gender lens a criterion in $868 billion of investment assets, up 2x from 2016.
The good news for those of us in the impact investing community, we’re way ahead of the curve on this and a main driver of the growth in the space! Why? Because along with recognizing the importance of no longer cutting women and minorities out of access to capital, social trends and family dynamics – with matriarchs and millennial inheritors prioritizing gender parity – has led us to invest in this sector for years. With the data now in, the arbitrage opportunity of altering investment screens ahead of the mainstream capital markets has paid off financially as well.
With $30 trillion dollars transferring intergenerationally over the next 30 years, at LOHAS Advisors we firmly believe that misconceptions of concessionary returns when investing in women will not only dissipate but will in fact swing investment dollars dramatically in the other direction, with companies and funds weighing equity of women in leadership as an important investment criteria as numbers prove out the investment thesis. Stay tuned!
A pioneer and thought leader in impact investing, Tami Kesselman is a Harvard-educated strategist and former Bain consultant working at the intersection of the highest levels of corporate, government, entrepreneurial and investor communities globally. A Partner at LOHAS Advisors, Tami is a strategy advisor for multiple investment funds and sustainability initiatives, helping clients navigate the increasingly complex intersection of capitalism, climate change, sustainability, public policy, business management, and geopolitics. Known for her innate ability to identify impact-related business model risks overlooked by others, she runs sessions for some of the world’s highest net worth families and leading asset managers and is regularly asked to pressure-test portfolio investments and philanthropic giving, advising on diligence filter revisions for impact alignment and for more comprehensive identification and mitigation of ESG and climate risks across asset classes.
Tami serves on the Steering Committee for the United Nations-NEXUS Small Island Resiliency Braintrust and the NEXUS Impact Investing Working Group where she advises next gen heirs of some of the world’s largest families on portfolio stewardship and wealth transition. She also annually chairs Opal’s Private Wealth Impact Investing Forum, curating discussions about today’s evolving wealth priorities for asset managers, wealth advisors and family office principals grappling with how evolving societal issues and climate change will impact their portfolios.
Tami also works directly with entrepreneurial management teams as they iterate businesses from seed through Series C funding rounds, and lectures annually on improved impact diligence at Harvard Business School, at the United Nations, and at conferences for investor audiences around the world. One of her most popular Harvard talks, based on the proprietary 10-question heuristic diligence framework she developed, SMARTimpact™, draws upon insights from analysis of more than three decades of business models that seemed successful on the surface but had systemic flaws which should have been flagged from the beginning and ultimately led to underperformance or worse. A book based this model is in the works. Tami serves on the Governance Committee for the Harvard Kennedy School’s Alumni Board of Directors and is President of Harvard Alumni IMPACTS (Investment | Measurement | Policy | Advocacy | Climate | Tech4good | Sustainability), an official Harvard alumni organization with more than 1000 members from all 12 Harvard graduate programs in more than 60 countries around the world. She has emceed multiple TEDx events and thrives on opportunities to inspire traditional investors to shift to an impact investing mindset while remaining true to their market objectives.