Yale's New Diversity Edict: A Shift in Institutional Investing?

This development represents a potentially significant shift in the landscape of venture capital and investment management. Yale University, with its substantial $32 billion endowment overseen since 1985 by the renowned investor David Swensen, has recently informed its 70 U.S.-based investment firms that prioritizing diversity is now a core expectation.

The Wall Street Journal reports that Swensen has communicated to these firms that their annual evaluations will now include a measurement of their advancements in enhancing the diversity of their investment teams. This assessment will encompass all aspects of personnel management, including recruitment, training programs, mentorship opportunities, and the continued employment of women and minority professionals.

Swensen indicated to the publication that firms demonstrating insufficient progress in these areas may face the withdrawal of Yale’s investment capital.

The importance of this decision cannot be overstated. Despite a period of somewhat weaker performance for Yale’s endowment last year, Swensen, age 66, is widely considered one of the most influential figures in investment management. He has overseen the growth of Yale’s endowment from $1 billion to its current size, making it the second-largest university endowment in the nation, trailing only Harvard’s $40 billion.

Swensen is recognized as the architect of the “Yale Model,” a strategy characterized by a reduced allocation to public equities and increased investments in venture capital firms, private equity funds, hedge funds, and international markets. This approach has served as a model for numerous other endowment managers, many of whom previously worked under Swensen’s direction, including the current leaders of the endowments at Princeton, Stanford, and the University of Pennsylvania.

It is reasonable to anticipate that these and other managers will emulate Swensen’s latest initiative, which is rooted in the increasing diversity within Yale University itself. If these diversity metrics become commonplace, they could bring about substantial changes in the traditionally homogenous world of money management, which is predominantly composed of white and male professionals.

In fact, the underrepresentation of women and minorities within venture capital firms is a well-known issue. A 2019 study commissioned by the Knight Foundation and referenced by the Wall Street Journal highlights the extent of this disparity across various asset classes. The study revealed that firms owned by women and minorities managed less than 1% of assets in mutual funds, hedge funds, private-equity funds, and real-estate funds in 2017, despite achieving comparable performance to other firms.

Swensen explained to the Wall Street Journal that while he has consistently discussed diversity with fund managers, he refrained from requesting systematic changes previously due to concerns about the limited number of diverse candidates entering the asset management field.

The momentum of the Black Lives Matter movement this past spring prompted him to proceed with this initiative regardless.

Fund managers will now be responsible for addressing this perceived pipeline issue. Swensen has reportedly suggested a potential solution to these managers: to move beyond traditional resume screening and actively recruit directly from university campuses.