Alpha plus ESG equals an inclusive future

There are many ways Bahiyah Yasmeen Robinson and Keith Spears have brought investors and great ideas together over the years — events, one-on-one meetings, fundraising — but their current work in managing Include Venture Partners may just have a bigger impact yet.

The U.S.-based fund of funds and separately managed account platform focuses on investing in diverse-led undervalued, outperforming funds and founders, with a focus on ESG and sustainability.

Robinson is a partner at Include Venture Partners and the CEO of emerging manager firm VC Include. A recognized innovator of new avenues for VC and impact investment, her expertise in leading technology, investment and social impact initiatives culminated in creating VC Include (VCI) in 2018.

According to a recent study from the Bella Research Group and the John S. and James L. Knight Foundation, just 1.3% of the over $69 trillion of assets in the U.S. is managed by women and minorities. VC Include meets this market opportunity by building an ecosystem of women, Black, Latinx, Indigenous and LGBTQ+ managers in alternative investments.

Robinson expanded the first online technology competitions and conferences in Africa to provide early-stage capital to the first wave of technology entrepreneurs throughout the continent, partnering with The U.S. Department of State, The World Bank, Microsoft, Mozilla and Nokia. Prior to that, she was a senior consultant at Ashoka, where she devised value-added propositions for clients including Exxon Mobil, G20, AMGEN, The eBay Foundation, HUD, Google and Omidyar Network.

Based on her love of contemporary emerging artists, she launched Young Art Collector in 2012 to connect art collectors with artists within the African Diaspora. Robinson was a former Co-chair with the Aspen Network of Development Entrepreneurs, and is a graduate of University of California, Davis. Her work has been recognized by the Knight Foundation, Echoing Green, Entrepreneur, CNN and Forbes.

Spears is a partner at Include Venture Partners and a senior advisor at BIPOC venture firm VC Include. Over a nearly 30-year career, Spears has advised on over $47 billion in transactions, including approximately $30 billion in 80 private equity fund investments and co-investments and $17 billion in 75 mergers, acquisitions and related financings.

Barreto: Bahiyah and Keith, thank you for agreeing to share your insights with Alternatives Watch readers.

Please speak to the broader mission of your fund of funds, Include Venture Partners, and what you’re looking for in the underlying funds you’ll be investing in. What are you looking for as you start to build out your underlying portfolio?

Robinson: Thanks so much for having us to talk a bit about Include Venture Partners.

Include Ventures thesis is that alpha plus ESG can be achieved by investing in women-led and diverse emerging managers. We focus on health tech, FinTech, media tech, and EdTech opportunities, and look for ways to embed ESG benchmarks around climate and cleantech at the fund and founder level. In this way, we’re investing in firms and companies that are building a culture of inclusion, sustainability and good governance at the early stages.

Include Venture Partners is composed of three partners: myself, Keith and Dr. Taj Eldridge. We came together because we saw an opportunity in the market on two levels, one to invest in best-in-class, women-led and diversified emerging managers that were Fund I, II and III firms that were driving value and outperforming the S&P by looking at new innovations and rapid growth around industries that affect how communities live, work and thrive.

Part of our differentiator is that last piece because we have a clear conviction around cleantech, climate tech and more broadly, environmental, social and governance consideration. ESG is an important driver across those verticals and across those industries, in exciting ways. We’ve engaged with many funds and companies that we have high conviction about their ability to shape the market and communities by adding meaningful value.

Spears: Yes, we’ll be looking to invest in first, second and third fund managers. Typically, these funds are in the $25 million to $150 million in size. We’re looking for fund managers who are leaders in their areas of expertise, who are able to drive value within their portfolio – industry leaders who are looking to have impact at scale; fund managers who can add value and really drive alpha and impact within their company investments.

Barreto: How would you describe the ecosystem of diverse-led funds at this time?

Spears: The ecosystem for diverse managers is robust and thriving. We’ve vetted a pipeline of over 500 diverse or women led funds and opportunities.

Robinson: The ecosystem of diverse-led funds, and LPs that invest in them has really transformed over the last 18 months. There were great funds before that, but the spotlight clicked on in 2020.

We launched the initial VC Include platform in 2018 as a way to aggregate best-in-class women and diverse-led emerging managers raising their first, second or third funds, focused on venture capital and impact investing. What we’ve seen over the last 12 to 18 months is a real sea change in asset allocator and asset owner appetite to expand their portfolios with investments in diverse managers.

As allocators are investing more in private markets, and particularly because venture capital is both a higher risk profile but also higher potential return profile, there’s opportunity and appetite now to make sure that women and people of color particularly in the US, but even outside of US borders, can participate in those opportunities.

Barreto: How would you position the opportunity set for investors just considering diverse-led and ESG, sustainability focused fund investments?

Robinson: Well, if you look at the recent investment industry publications and reports that have been circulated over the last year, there are clear indicators that ESG, climate investment/funds and climate solutions, cleantech and sustainability more broadly, is really reaching a fever pitch in terms of investment opportunities.

And there are multiple industry reports that put these opportunities to invest in diverse-led funds and to gender lens funds into niche strategy buckets. We are increasingly seeing these funds as more of an opportunity to generate outsized returns, which is what a lot of the literature and investment publication references are pointing to.
 
The pandemic and domestic civil unrest more broadly, has really driven demand in these types of products, because a lot of women and diverse managers have metrics on impact, ESG and sustainability embedded in their strategy.

Spears: There are a number of studies, including one articulated by Paul Gompers and Silpa Kovvali writing for the Harvard Business Review in July-August 2018 in an article entitled The Other Diversity Dividend, about the venture capital industry in particular, that provide empirical evidence that diversity drives returns.

The report reads, “Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though the desire to associate with similar people — a tendency academics call homophily — can bring social benefits to those who exhibit it, including a sense of shared culture and belonging, it can also lead investors and firms to leave a lot of money on the table.”

We have been able to demonstrate that at the fund level as well as at the company level, the positive impact of diversity on returns. So that is what’s driving a lot of our investment focus.

Barreto: What misconceptions may exist when it comes to the investment set you’re chasing?

Spears: I think the primary misconception is that there’s not a supply of very strong managers that are in this space. We fundamentally believe that historical metrics of track record and performance need to be shifted.

Credit needs to be awarded to emerging managers who have a track record of success. And what we’ve done is to come up with a rubric, if you will, that evaluates these fund managers based on the value add that they’ve created, their track record, their ability to generate impact at scale, the size and scale their ecosystem, their strategic partnerships in their process and how they adhere to that process. So we’ve developed that, and we fundamentally think we can ‘force rank’ these managers and come up with what we believe to be some of the best performers in this sector.

Robinson: I think the misconceptions really center around perceived risk around investing in first time funds. Typically, when they do well, they perform exceedingly well for allocators that can integrate that opportunity set into their larger portfolio. Undervaluing and underpricing products that women and people of color develop is a reality that we believe is starting to shift.

There are new allocators looking at ventures at the cross-section of impact investment, who are looking at ESG, sustainability and climate in a different way, and in some cases, adding those verticals to their portfolio. The misconceptions are starting to soften a bit, and we believe there’s still a lot of opportunity to drive alpha by investing in them.

Barreto: What sub-sectors of the ESG and sustainability investing universe seem particularly compelling to you at this time in the cycle?

Robinson: Clean tech and climate solutions are dynamic opportunities right now.

We are bullish on sourcing and supporting climate funds run by historically underrepresented groups and women.

We have partnered with the Hewlett Foundation to launch a pilot initiative focused on diverse emerging managers in the US and Europe that are building and investing in solutions to address climate change. Solar and electric vehicles and clean infrastructure are all very exciting opportunities that we are taking close look at.

Spears: For me, there are four sectors that are particularly interesting.

The first is climate. With the federal government’s focus on climate change and investment in that space we think there will be some tremendous tailwinds for investors looking to deploy capital there.

We’re proud of our government connectivity paired with company relationships where we can have pilot programs around new climate technologies. One of our partners, Dr. Taj Ahmad Eldridge, formerly ran the Los Angeles Cleantech Incubator (LACI) and prior to that, was at UC Riverside investing in deals. He has a tremendous pipeline of funds and deals in that space.

The second category that we particularly like is his health tech. Because of COVID, concerns around health, wellness, mental health and the like, there’s a lot of opportunities in that space. And so that’s another area of focus for us.

The third area that I would highlight is EdTech. Given our changing work environment, it’s important for folks to develop new and different skills for the jobs of tomorrow. And so, companies that are focused around that, we see a tremendous amount of potential.

The fourth sector is FinTech. We think companies that make the markets more accessible to investors, to help them invest and create wealth, are attractive as well.

Barreto: Please speak to the FinTech opportunities in particular.

Spears: For us we focus on companies that are increasing access to finance, financial instruments within BIPOC communities. So any FinTech platform that is addressing that market, providing commercial banking and investment opportunities for that market, in a platform that’s easy to use, accessible, and increases financial literacy within that segment. Those are the companies that get me personally excited. So there are companies like Mocafi, who have done a great job in that area, among others

Barreto: How do you envision this ecosystem evolving over time?

Robinson: I envision the ecosystem becoming a part of the regular ecosystem of emerging fund managers and direct deals.

The very fact that we have to be explicit about a racial and gender lens points to a deeper lack of integration and access from an ownership perspective.

We believe that integrating both racial and gender equity in the asset management industry, increasing the percentage of assets under management run by women and people of color, and growing that number exponentially means that we will hopefully no longer have to talk about that small number and really start to drive an even more resilient, robust and dynamic economy globally.

We see this as an opportunity to show that inclusion is not a dirty word, that it actually is a market driver and can create higher alpha for all.

Spears: The ecosystem is evolving and we want to be at the cutting edge of that.

We believe that by demonstrating early stage manager and diverse company performance, we can attract more capital to this space so it becomes fully integrated in people’s thought processes and approaches.

We are on a mission to make sure that we can make that happen, and hopefully see increased capital devoted to this sector.

Barreto: Bahiyah and Keith, thank you again, for sharing your expertise.

Robinson: Thank you, Susan.

Spears: Thank you, Susan.

Susan Barreto

Susan is an award-winning journalist who has worked for a number of global financial publications including Pensions & Investments, HFM Week, Absolute Return, InvestHedge and Lipper HedgeWorld. Much of her career has been covering the global finance industry with an institutional investment focus covering pensions, endowments, foundations and family offices for more than two decades. She has covered hedge fund strategies most recently as Editor-at-Large for HFM Global.

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