Why a First Time Fund May Be What Your Portfolio Is Missing

by Suzanne Biegel, C-Founder, GenderSmart and Laura Kemp-Pedersen, Founder, ImpactInc.

A recent study by the International Finance Corporation (IFC) famously revealed that gender diverse fund management teams deliver an incremental 10% to 20% in returns compared to non-gender diverse teams. 

But accessing these additional returns through established managers can prove challenging. Only 10% to 11% of senior roles in private equity are held by women, according to Prequin, so investors looking for the opportunity to unlock additional alpha by investing in female and diverse led teams will need to look towards women-led first time funds.

First Time Funds: Risk or Opportunity?

The most optimistic data available shows that the amount of capital invested in women-led first time funds was approximately 3% of the more than $400 billion raised by private equity funds in 2020. 

“32% of first-time funds achieved top-quartile performance, compared with 24% for all other funds”

This clearly does not square with the potential performance advantages of investing in these funds. According to Prequin, first-time private capital fund managers typically outperform non-first-time funds: first-time funds have higher median net IRRs than non-first-time funds across 13 of the 16 vintage years going back to 2000. These vehicles have surpassed the net IRRs of all other funds by at least three percentage points for 2000, 2002-2004 and 2010-2011 vintage years. This outperformance is particularly apparent in quartile rankings: 32% of first-time funds achieved top-quartile performance (all vintages combined), compared with 24% for all other funds.

To look at the problem more closely, GenderSmart’s First Time Women-Led and Gender Diverse Funds Initiative, sponsored by the Visa Foundation, was established in early 2020. It brought together a diverse group of stakeholders from leading organisations including CDC, Bank of America, VC Include, Collaborative for Frontier Finance, SEAF, Cambridge Associates, and many others, to try to solve for how to get more capital flowing to women.

As part of this work, more than 20 capital allocators and advisors were interviewed to understand attitudes towards investing in first time, women-led funds with a gender lens. With the exception of a few mid-size family offices, the overriding concern was the risk profile presented by these fund managers, with an emphasis on the perceived lack of track record, concerns around partner dynamics and commitment, and the ability to meet regulatory capital and filing obligations in a manner that satisfies the needs of investors. 

These perceived risk factors, coupled with inherent bias in the allocation of capital (90% percent of senior investment professionals are men) compounds the challenge for women-led first time funds. Rather than seeing the incremental returns opportunity presented by this group, many investors simply take the position that they cannot invest, or, as one woman raising her first fund was recently told, “I’ve already invested in Tracy’s fund”-- signalling investing in a female-led fund is merely a box ticking exercise.

New Approaches to Unlocking Capital

The issue of access to capital by women fund managers has given rise to new and innovative organisations creating structural solutions to tackle this issue head-on: fund platforms, fund of funds, fund accelerators, and more. As part of the First Time Women Led and Diverse Funds Initiative, we interviewed 16 of these organisations working to open up access to capital and other needed resources to first time women led funds. Here are a few examples:

VC Include curates networks and programs with GPs and LPs to expand opportunities that improve investment outcomes through the power of diversity. Their programs and platform provide the infrastructure needed for Black, LatinX, Indigenous and women-led fund managers to scale. 

WoWE invests in a “full potential scenario,” in which women fully participate in capital markets in order to drive resilient and sustainable investment systems and economies at scale. Working across asset classes, the goal is to mainstream investing in women through an endowment that is 100% mission-aligned, delivering market-rate, risk-adjusted returns and impact at scale.

Collaborative for Frontier Finance is a multi-stakeholder initiative that aims to increase access to capital for small and growing businesses (SGBs) in emerging markets working with fund managers, funders, and field builders to accelerate financing solutions that target SGBs.

Beyond solutions, investment allocators--those holding the capital who understand the returns opportunity presented by these women led funds--are also actively integrating investment strategies and processes into their organisations that enable managers to be evaluated in the right way, bringing first time funds into their portfolio.

Jen Braswell, Head of Value Creation at the UK’s development finance institution, CDC has been a strong proponent for the opportunity to back first time women-led funds, “Amongst the Development Finance Institutions we have been having very rich conversations to identify what the challenges are to backing women-led first time funds. We agree there are structural challenges to overcome for capital allocators. And we know that the fund managers are also facing inherent bias. So I will say this is our year to start to address those challenges, and we’ve built a lot of consensus amongst the DFIs around what needs to change on our end in the way we approach these funds inside our institutions.”

More Returns, More Impact

For capital allocators who back first time funds, there is the opportunity to not only generate outstanding returns, but to influence the development of the private equity market and put their capital to work for impact.

“It’s about putting more than just your capital to work. It’s actually addressing systemic issues in society, and making money while you do so.”

Investing with a gender lens in women fund managers presents an opportunity for capital allocators to contribute to the promotion of gender equality on a deeper and wider scale, beyond just appointing women to boards. New funds bring financing to under-developed parts of the market, where lack of access to finance for women is entrenched--such as how female deal partners invest in almost twice as many female-led businesses than their male partners, says the IFC.

According to Adesuwa Okunbo Rhodes, founder of Aruwa Capital Management, one of the few women owned funds in Africa, investing in women-led first time funds offers more than just a performance advantage: “It’s about putting more than just your capital to work. It's actually addressing systemic issues in society, and making money while you do so.”

Photo by Christina @ wocintechchat.com on Unsplash