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Racial Disparities in Investing Are More Than a Pipeline Problem

SPARQ and impact investment firm Illumen Capital partnered to explore the factors that drive racial disparities in investing.

Of the $69.1 trillion global financial assets under management across mutual funds, hedge funds, real estate, and private equity, fewer than 1.3% are managed by women and people of color. In a new study, published in Proceedings of the National Academy of Sciences, Stanford SPARQ and impact investment firm Illumen Capital asked why this powerful, elite industry is so racially homogeneous.

Our research team conducted an online experiment with real asset allocators (i.e., those who manage and invest funds) to determine whether and how bias influences evaluations of funds led by people of color across different levels of performance. Below, we highlight some key findings that suggest underrepresentation of people of color in the realm of investing is not only a pipeline problem. We also share recommendations for diversifying the industry.

Key findings

  • Asset allocators have trouble gauging the competence of racially diverse teams. Asset allocators’ judgments of the team’s competence were more strongly correlated with predictions about future performance (e.g., money raised) for racially homogenous teams than for racially diverse teams.
Racially diverse teams face bias at the top.
  • At stronger performance levels, asset allocators rated white-led funds more favorably than they did black-led funds when evaluating investment skills, competence, and social fit.
Racially diverse teams get the benefit of the doubt at the bottom, but not more funding.
  • At weaker performance levels, asset allocators actually rated black-led teams more favorably than white-led teams in terms of overall performance, investment skills, and ability to raise money. However, asset allocators expressed little interest in investing in weaker funds, diverse or otherwise. 


  • Look beyond the pipeline problem. While the talent pipeline question has been rightfully examined and remains a key part of the solution, it alone will not solve the problem. A diverse population of entrepreneurs and fund managers already exists and the industry must create practices to ensure that their pipeline reflects that diversity. 

  • Follow through with intentions to diversify. At weaker levels of performance, black-male-led teams in the study received higher ratings than white-male-led teams, suggesting an opportunity to increase diverse teams’ access to capital. However, allocators in the study were not seriously considering investing in weaker funds. It takes more than reviewing a one-pager or taking the first meeting to diversify a portfolio; investors must set diversity benchmarks at each step of the decision-making process. 

  • Support strong diverse teams. The data suggest that the more qualified diverse teams are, the more bias they face. To get at the root of the challenge, decision-makers must support strong diverse teams who are still struggling to advance. 
Amplify the presence of diverse teams. The study results suggest that asset allocators have trouble gauging the difference between strong and weak teams led by people of color. This may be for a lack of experience with diverse teams, but not for the lack of diverse teams. Allocators should become knowledgeable about successful diverse teams and distribute this knowledge throughout their networks. 

  • Establish a transparent selection process. Asset allocators in the study assigned different ratings to teams with identical credentials. To ensure that all teams have a fair shot, investors need to define specific selection criteria, apply these criteria consistently, and make their decision-making process transparent.

Study Methodology

We asked 180 asset allocators to rate venture capital funds based on a one-page summary of the fund’s performance history. The funds were fictional but the accompanying one-pagers were realistic, containing short summaries of the team’s track record and investment strategies. We manipulated the race of the managing partner (white or black) and the strength of the one-pager quality (stronger or weaker). Asset allocators saw one of four versions of these one-pagers. We conducted statistical analyses to determine how much managing partner race and one-pager quality affected asset allocators’ ratings of the teams. 

About the Research Partnership 

This research was made possible through a partnership between Stanford SPARQ and Illumen Capital, supported by Prudential Financial and the William and Flora Hewlett Foundation. Illumen Capital is an impact investment firm focused on building equitable financial markets. In early 2017, the two organizations began to work together to examine the lack of gender and racial diversity in the financial services industry. The project's aim is to document and potentially reduce implicit biases that likely contribute to gender and racial disparities in investing. This report is the first in a series of research geared toward that goal.