by Lionesses of Africa Operations Department
This is the second of a three-part look at the fund management industry as it pertains to our inspirational 1.7 million members of Lionesses. We left last weekend with the shocking discovery that male attractiveness made a large difference in choice for both male and also female investors.(here). This week we look at one of the hot topics, that of the lack of female ‘cheque writers’ (i.e. actual investment decision makers) within the VC/PE industry and suggest a way to solve this.
‘Attractiveness’ is highly subjective, guided by many subconscious pressures, such as upbringing, early childhood impressions, schooling and so on. To give an example, the BBC3 ran a test, titled: “Do you have a gender bias?”, please take a moment to watch this, here. This is the impact of years and years of children’s books, nurture and schooling creating a stereotypical pigeon hole in which to put people for easy reference later in life. Although not all of us will fail this test, these ‘pigeon holes’ have impacted the entire world in some form and as we always say, over time a Casino owner only needs 1% in her favour to win - and here ‘over time’ is critical.
On the subject of time, Warren Buffet (one of the worlds greatest long term investors), says most of America's prosperity was created using only about 50% of its talent — men (which was great for him as he was only having to be better than 50% of the population). "For most of our history, women — whatever their abilities — have been relegated to the sidelines…Only in recent years have we begun to correct that problem.” (here). N.B. “begun” we still have such a mountain to climb especially in the investing world.
Investing (long or short term) should be a binary game. Win/Lose. ‘Win’ climb to the top, ‘lose’, get sacked and replaced. Perhaps this is where the answer lies. To ensure one stays at the top, one has to control the losses. One of the best ways to ensure that any losses you make do not single you out for the chop, is to ensure that your competition is also invested in the same, as the fund industry has shown by comparing themselves to their peers. If an industry sector’s value lost an average of 10% in a year and you were down only 5% in that sector, you are considered a market leader. Those that lost 15-17% will be looking for a new job. Ergo, find a group/sector in which to invest, stay safe, believe in your ability to eek out the occasional 1-2% of extra value (this is called ‘Alpha’ in the industry) and hug it close.
Wildebeest stick together in a herd simply because they don’t have to be faster than the Lioness, just faster than the Wildebeest next to them to survive that day and ultimately thrive. Standing alone on the plain is more of a binary race and even we can see that is not an attractive option.
Much like the animal kingdom to which we belong, we as humans are herding animals. We are drawn to others like us, yet (as the numbers confirm here), year after year after year, businesswomen are being left behind in investment, so we even herd by sub-sections. This lack of investment in turn means that they are seen as ‘bad bets’, either because ‘if no one else is investing in them, then why should I stick my neck out’ and because male businesses are seen as faster growers (steroids give an unfair advantage in sports - so too, investment is a steroid for the business world), faster growers in turn attract more investment and so the circle continues.
“Among the most often cited reasons why VC investors might be biased against women is homophily – the tendency of individuals to associate with others based on shared characteristics…Gender can act as a common driver for homophily. As such, female entrepreneurs may face a twofold challenge to obtain funding for their ventures: on the one hand, they tend to be underrepresented in traditional funding networks. On the other, male investors will tend to associate themselves more with male entrepreneurs.” (European Investment Bank, here).
Great given the main belief is that the investing industry as a whole is made up of males. To give an example, across the whole of the UK’s open-ended funds, there are more funds run by someone called David, than those run by women! (here). As Morningstar says, this is “…a stark reminder of the lack of diversity across the fund industry, which is often accused of being “pale, male and stale” (here).
Similar results are confirmed elsewhere…
“…women investment managers in the U.S. in the $15 trillion mutual fund marketplace have fallen from 10% of the industry in 2009 to less than 7% today. In alternative asset classes, women represent 6% in private equity, 4% in real estate and 3% in hedge funds.” (Wharton here)
“When it comes to gender diversity, the global fund industry looks much like it did 20 years ago: At the end of 2000, 14% of fund managers were women. And at the end of 2019, 14% of fund managers were women.” (M/Star here)
Yet failure to bring gender diversity in funds has nothing to do with performance: “Men and women deliver equally competitive fund performance, as do mixed-gender teams…These performance trends do not explain the lack of gender diversity in the fund industry…Men have benefited from the industry's growth, capturing nearly all net new fund-management roles…Women have entered the industry at the same rate they have exited it, so their representation has fallen as the industry has expanded.” (M/Star here)
According to the UK’s DFI British International Investment ‘BII’ (ex CDC) there is a trade off between risk and reward (that much we were all taught at school), but when you are ‘playing’ with taxpayers money (as these DFIs all have to consider), they have to ensure that either the risk is really worth it, or if they can get the same or close to the same impact by investing in proven strategies and company sectors, then they will continue to role the dice there. They explain this in their Research paper: ‘Risk, Return and Impact. Practical thinking on investing for development.’ (here)
“Making an investment is therefore a bit like rolling dice. Imagine, instead of rolling conventional dice numbered one to six, choosing between different coloured dice with different numbers that represent financial returns. The red dice has numbers zero to five, the blue has one to six and the green two to seven. If DFIs must tolerate lower returns to have more impact, that means rolling the red dice.
Whether DFIs must tolerate lower returns to have more impact depends on the universe of investment opportunities. If you can find investment opportunities that will achieve all your impact objectives and deliver high average portfolio returns, you can keep rolling the green dice and there is no need to pick up the red. It would be irresponsible to start rolling the red dice, because it would reduce the funds that can be recycled into future impact generating investments. However, if some impact objectives can only be achieved by rolling the red dice, then the optimal impact portfolio will include these, alongside the blues and greens, which will pull down average returns.”
As well as being one of the world’s largest DFIs, the UK’s BII is one of the globe’s leading and well respected thought leaders on impact investing, so we would not be surprised if this is the thinking across most of the DFI world.
So once you know the rules of the game, you know how to play it. How can we therefore get more women’s businesses onto the Green dice? Especially as the BII and many other DFIs (plus the UN itself) are large investors into developing-nation Banks, Development PE Funds (e.g. here and here).
The ever growing view (and one we totally support and push at every chance) is as Morningstar say (here): “When sizing up founders, familiarity breeds comfort…studies suggest that female VCs are twice as likely as male investors to invest in startups founded by women. But only about 12% of current check-writers are women. Increasing that percentage would likely increase the number of female-founded startups getting venture capital.”
Easy to say, but how that is done? Well, if as we see from the independent evaluation of BII’s investments (here), much of this is in Financial Institutions - perhaps it is about time that the one who pays the piper makes a stand. Invest only in investment funds that have 50% women in cheque writing positions and in banks that are willing to drill down into their own investments to deliver the information on gender investing that we all (as taxpayers and global citizens) require of our DFIs. Although we recognise that there are different regulations surrounding reporting, if they are serious about levelling the playing field for a more diverse, equal, just and ultimately more profitable and developed world, women cannot be excluded in this way and by changing the percentage of actual decision makers, this will filter down the investment into an essential part of our globe.
These actions would work, as we saw with the move into green and sustainability investment. The moment money started to turn, so too the explosion of green and sustainability centric or themed funds. DFI money, guarantees and soft loans are highly sort after, dangle the carrot, the Donkey will follow and suddenly we will have actual gender movement. Not the movement we have had over the past 23 years since the UN started to talk about development goals, but actual certifiable development and impact.
Of course, we could just try doing the same thing over and over again…But as all males know, if at first you don’t succeed, try again, if you fail again, try again, if you fail a further time - just go back to how your mother or wife told you to do it in the first place.
Amen to that!
Stay safe.