The article, by Luis Garcia, focuses on the impact diversity-funding initiatives are having on the ways Private Equity investors are approaching minority-owned businesses - and the wider reaching repercussions of such decisions.

SAN DIEGO, CA – September 11, 2023 – Dr. Matt Brubaker, CEO of advisory firm FMG Leading, was recently featured in a Wall Street Journal article focused on Private Equity’s approach to investing in minority-owned business.

ARTICLE

Dr. Matt Brubaker

Diversity-Focused Firms Cautiously Stick to Their Strategies

Some investment firms that target companies backed by women and minorities are rethinking the way they present their strategies to reduce litigation risk.

Some private investment firms that back minority-owned businesses are responding with a mix of defiance and caution to a wave of litigation against diversity-driven funding programs. Firms say they plan to stick to their strategies while seeking to ward off potential legal challenges.

Fearless Fund, a firm that makes early-stage investments in companies owned by women of color, was one of the latest targets of lawsuits that accused companies and fund managers of discrimination through grant programs focused on racial minorities. Large companies such as Comcast, Amazon and Starbucks have also been sued for similar reasons.

Legal challenges have gained momentum following the Supreme Court’s decision in June that effectively prohibits universities from considering race in their admissions, according to fund managers and consultants. The lawsuits so far have been directed mostly at grant programs, but loans and other investment strategies that focus on minority-owned businesses could also be at risk, the fund managers said.

“We have to be more careful with how we architect those programs,” said George Ashton, a managing director at Local Initiatives Support Corp., a New York-based nonprofit that seeks to increase communities’ access to capital.

Ashton leads the organization’s impact investments, or strategies that look to combine social benefits with financial goals. Capital pools under his watch include a $250 million Black Economic Development Fund that provides loans to Black-owned businesses, or any business that benefits the Black community, and has among its investors large companies such as Netflix, PayPal, Costco, McKinsey and Dupont.

“We’re not going to stop doing the work that’s important, [but] we’ll have to obviously adjust our approach,” Ashton said.

Local Initiatives Support Corp. is seeking to reduce litigation risks by being “less specific” about what minority groups its investments target and by shifting its focus to socio-economic factors, he said. That will likely increase investment costs as it will make it more difficult to ensure business owners qualify for loans, he added.

“It’s so easy to verify that you are of a certain race. It may be harder to verify that you have the [required] adversities,” Ashton said. “I think in that way it’s a bit more challenging as well.”

Diversity-focused fund managers say their strategies look to level a playing field that is already heavily skewed against them across the private-equity industry. A report by consulting firm McKinsey released in August showed that women represent 17% of private-equity firms’ leadership positions and 20% of private-equity executives at the level of managing directors. Black executives account for only 3% of positions in both categories in the U.S. and Canada while making up 14% of the U.S. population, according to the study, which pooled data from 54 private-equity firms and 12 institutional investors.

“There are some businesses where that diversity focus becomes the key to driving value.”

— Matt Brubaker

The threat of lawsuits may prompt diversity-focused firms to double down on their strategies as they can reinforce a sense of mission, said Diane Yoo, a founding managing partner at FilKor Capital, a venture-capital firm that focuses on technology startups led by at least one Asian-American woman, according to its website.

“I don’t believe their strategies will change much,” Yoo said. “What I’ve seen generally in the industry is that there has been more action to stand up for diverse [business] founders.”

She cited Fearless Fund, which said in a statement that “the mission of our fund and our commitment to principles of antidiscrimination could not be stronger.”

Yoo added, however, that firms that don’t have a record of good performance could find it harder to raise capital, as some investors may become more cautious about strategies focused on diversity.

“You can’t say I invest in Black founders and that’s my thesis,” she said. “That is not going to hold up because what [investors] are looking for is returns.”

Fearless Fund has garnered some industry support for its defense. The National Venture Capital Association trade group has filed an amicus curiae brief with the federal court in support of Fearless Fund. Among the arguments cited in the brief are the contributions that a more diverse venture-capital industry stands to make to U.S. economic growth.

The best way investment firms and companies can steer away from the controversy around affirmative action and reduce the risk of litigation is to show that diversity gives them an advantage, said Matt Brubaker, chief executive and chairman of FMG Leading, a consulting firm that specializes in leadership, business culture and other people-related areas.

“There are some businesses where that diversity focus becomes the key to driving value,” he said. He cited, for example, healthcare companies that cater to patients of various ethnic groups.

---

Read complete article here. A Wall Street Journal online subscription may be required.

—Laura Kreutzer contributed to this article

---