Blossom Capital Is Proof That Investing in Diversity Yields Superior Returns

Below, Louis Hernandez, Jr. Founder, CEO and Managing Director at Black Dragon Capital discusses one of the key elements that makes Blossom capital successful, its drive for diversity.

Ophelia Brown should be celebrating. But what comes through in a January 22 Fortune profile is frustration. Brown, Blossom Capital’s 33-year-old founder, isn’t pleased that the questions she gets are less about performance than about the novelty of being a woman in private equity and the founder of a firm with two other female partners.

Brown says, rightly, that the focus should be on the firm’s results. But for the private equity industry, the attention may be a necessary corrective. PE leaders should clearly be aware of two things: one, private equity lags badly on diversity, and two, firms that achieve gender, racial and ethnic diversity dramatically outperform their homogenous peers.

Diversity is a hot topic in business, as it should be. It leads to superior performance

The value of diversity and the failure to achieve it isn’t limited to private equity, of course. It’s a pressing topic for business in general and for society in general. The value of gender diversity received attention at Davos, as did the lack of gender diversity in the Davos audience. The value of diversity in business in general is clearly documented in a 2018 McKinsey study, which reports superior EBIT and long-term value creation for companies that rank highest in racial, ethnic and gender diversity.

The numbers show that diverse private equity firms outperform

The numbers in PE tell a similar story. In a 2018 Harvard Business Review article, Harvard Business School professor Paul Gompers and research associate Silpa Kovvali describe their in-depth examination of diversity in venture capital. They report that “shared ethnicity reduc[ed] an investment’s comparative success rate by 26.4% to 32.2%.” Gender diversity paid off, too. “Venture capital firms that increased their proportion of female partner hires by 10% saw, on average, a 1.5% spike in overall fund returns each year and had 9.7% more profitable exits.” This is for an industry they correctly describe as “staggeringly homogenous… only 8% of the investors are women… about 2% are Hispanic, and fewer than 1% are black.”

Diversity brings more viewpoints to the table, and those viewpoints generate results

Although feeling justifiably frustrated, Brown confirms that diversity is itself a performance driver. She credits Blossom Capital’s success to the array of viewpoints at the table (“Men and women do judge different products differently”) and the firm’s willingness to embrace divergent views and disagreement (“We have disparate opinions,” she says, noting that the firm’s process is designed to draw out disagreement).

My own experience confirms this. I am the founder of Black Dragon Capital, a minority-led private equity firm that is 75% ethnically and gender diverse. For us, as for Blossom Capital, diversity means more talent and more viewpoints at the table. A diverse team of general partners has more connections in more places, so it can find more opportunities. That by itself can be the margin of difference when you’re competing to take a significant position in a company with the potential to be a market leader. But the value of diversity really stands out once the investment is in the portfolio. Gompers and Kovvali agree. They found the biggest gains from diversity “came later, when the investors helped shape strategy, recruitment and other efforts critical to a young company’s survival and growth. Thriving in a highly uncertain competitive environment requires creative thinking in those areas, and the diverse collaborators were better equipped to deliver it.”

For us, as for Blossom Capital, diversity means more talent and more viewpoints at the table.

Diversity should be high among your recruiting goals. Here’s how to do it

How to achieve diversity? Our answer is not only to recruit aggressively, but also to grow our own leaders. It’s not enough to limit yourself to a few high-profile hires to satisfy societal pressure. Your organization needs to be truly diverse. Initiatives like CEO Action for Diversity and Inclusion show how to go beyond window dressing and commit the entire organization to diversity. More than 800 CEOs have now taken the organization’s pledge, among them the CEOs of Apollo General Management, Black Rock, the Carlyle Group and General Atlantic.

But the most valuable and lasting way to achieve diversity, reap its benefits and bake it into the organization is to attract and retain the best and the brightest at all levels. That includes building a diverse team starting in junior positions and investing in long-term development. The result will be a strong future leadership cadre.

To accomplish this, we employ a proprietary methodology that we call The Black Dragon Leadership Index™. It’s a framework for evaluating both hard performance metrics and soft values, such as emotional intelligence. We use it to evaluate all talent, no matter the background. But it truly shines as a tool for identifying, and opening up opportunities for a bigger, more diverse leadership group.

You may have such a tool in your own arsenal. If not, consider building one. Whether you run an operating business or an investment firm, the more you commit to diversity, the more you will reap the benefit.