Illumen Capital CEO-Professional Investors Let Racial Bias Cloud Their Judgment, Harm Their ROI

Forbes

Daryn Dodson previously led the Special Equities Program as a consultant to the Board of the Calvert Funds, a $12 billion pioneer of the impact investing field. Through this vehicle, Calvert maintains a portfolio of more than 40 funds on five continents, representing over 350 underlying portfolio companies. Prior to serving as a consultant to Calvert, Daryn served as Director of University and Corporate Partnership for The Idea Village, where he created a platform engaging leading private equity firms, business schools, and Fortune 500 companies to invest in New Orleans entrepreneurs post-Hurricane Katrina.  Mr. Dodson currently serves on the Board of Directors for Ben and Jerry’s.  He earned his M.B.A. from Stanford, where he serves on the Dean’s Management Board, and his A.B. from Duke University.  Daryn Dodson sat down with Ali Jackson-Jolley to discuss how Black-led VC firms face more bias the higher they perform, how professional investors perceive “Blackness” as a risk, and why bias training is critical to closing the VC funding gap.  0:00 Introduction 0:14 Daryn Explains The Growing Gap In Wealth Management 1:39 How Do Managers Decide Who Is Worth The Investment 4:24 What Tools Are Being Used To Close The Gap? 6:24 Is There Hope?: Daryn Shares More On Addressing The Gap In Opportunities 9:11 BIPOC Women And Where They Stand In The Wealth Gap  Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1  Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:  https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript  Stay Connected Forbes newsletters: https://newsletters.editorial.forbes.com Forbes on Facebook: http://fb.com/forbes Forbes Video on Twitter: http://www.twitter.com/forbes Forbes Video on Instagram: http://instagram.com/forbes More From Forbes:  http://forbes.com  Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.

Transcript

00:00 Hi, I'm Allie Jackson Jolly. I'm here with Darren Dodson, who is CEO of Illumine Capital.

00:10 Darren, welcome and thanks for being here with us.

00:13 It's great to be here.

00:14 Yeah. So you reached out to me because there was some new research you did around the growing

00:23 gap in wealth management as it relates to race. Could you talk me through some of those

00:30 facts that you think we should know?

00:32 Sure. To start out with, Illumine Capital is a private equity venture capital and growth

00:40 fund of funds. So we conducted research with Stanford Spark Center. And what we did is

00:47 we looked at the 1.4 percent of $82 trillion in the asset management business that women

00:55 and people of color use in terms of the firms that they have, which we thought was quite

01:02 low. So one of the things that we did is we tested 180 asset allocators for bias. And

01:11 what we found is that they were more likely to leave money on the table than invest in

01:18 high performing black led funds when A/B tested against white led funds. So that was a striking

01:24 finding because that means that they're underestimated and overlooked entrepreneurs throughout the

01:31 ecosystem, as well as fund managers that are not getting the capital consistent with their

01:37 performance.

01:38 And when in that research, did you drill down any? Were there any findings or lessons that

01:44 we could learn about exactly how race was impacting decisions on investment or like

01:52 what it was specifically about perceptions about, you know, the managers that felt like

02:02 they weren't good, you know, people to invest in?

02:05 Well, the most striking finding was the higher that black managers performed, the more bias

02:12 they faced, which created an issue for those that are fiduciaries that manage the largest

02:19 pools of capital in the world, such as sovereign wealth funds or pension funds. And it sort

02:27 of called the question of whether or not they're meeting their obligations under their fiduciary

02:32 duty by not looking at managers of color as a potential for outperformance of their larger

02:42 portfolio.

02:43 Because if these managers were outperforming and facing more and more bias, less likely

02:48 to be selected, then that's a problem for the broader financial markets to really look

02:54 more deeply into.

02:57 And so what I mean, it's like the question of the day, right? What can be done? We know

03:02 that implicit and sometimes overt bias is a very real issue in this country. It's one

03:11 that we haven't fully grappled with or addressed. So so what can be done to find out that bias

03:19 to to try and push those numbers beyond that one point four, which is you're right, appallingly

03:25 low. What are your suggestions?

03:27 Well, one of the things that we can do is look at the example of Illumine Capital. So

03:34 Illumine Capital was actually built by myself and my colleagues to create an investment

03:41 platform that interrupts these biases through partnerships with our managers. And we look

03:47 at bias within the hiring, promotion and retention of talent processes. One one area. Then we

03:54 look at a second area within the selection of investments. And the third area that we

03:59 look at is in the board construction of the companies we invest in and and and control.

04:07 So we want to make sure that these different biases don't creep into these decision making

04:12 processes. So as an investor in private equity and venture and growth funds, we work very

04:18 closely with these managers to improve across their platforms.

04:22 Hmm. Yeah. But I guess what I mean is I'm curious, like, what does that training look

04:28 like if somebody has a innate bias around what a good manager is and isn't and race

04:38 is coming into play? How do you like is there a different scale that you're asking people

04:43 to look at? What exactly are the tools that you're helping to provide to make people address

04:50 what could be racism? Well, thanks for the question. One of the

04:54 things that we do in terms of an intervention and it's a 10 year process for our managers.

05:00 So this is a time intensive process that we focus on largely because we think there's

05:07 a lot of value on the other side. But one example of one exercise might be to look at

05:13 the questions that the manager asked to ensure that they're consistent across men and women

05:19 and women and people of color and and white men. What we see in terms of evaluative processes

05:28 is that the questions what we see across evaluative processes is that the questions actually change

05:37 when women or people of color are being evaluated versus white men. We see the questions are

05:44 a lot more opportunistic on the white male evaluation side, whereas on the women and

05:50 people of color side, they're very downside oriented. And as human beings and social psychology,

05:58 we often answer questions the way that they're asked and that impacts the way that we answer

06:04 them. But the assumption that something should be downside oriented because it's a woman

06:09 and a person of color is not a good assumption for comparing consistently across investments.

06:16 We see a lot better results when things are compared effectively and apples to apples.

06:24 So what makes you optimistic? You obviously have a rather large hill to climb in terms

06:32 of flattening out this bias. But what can I ask you? Is there anything that makes you

06:37 optimistic that you think that this gap you're able to close this gap? Eventually, this gap

06:44 will get closed. Well, you know, one of the things that Nelson Mandela said from prison

06:51 about when he knew he might be free again was when there was blood in the streets. He

06:58 thought that the grasp of apartheid was so strong and so in fear of losing control that

07:09 they would do drastic things to keep power in place. So when I look at George Floyd in

07:15 that moment of the country killing this unarmed black man or this policeman perpetrating that

07:27 type of violence, one of the things that makes me in a way optimistic is that those that

07:35 are preventing the flows of capital to women and people of color are desperately trying

07:41 to do it against their own financial interest and returns. I think that in some sense that

07:48 overt part of it is very pronounced right now as there's pushback against DEI and other

07:55 aspects of advancement in society. But in this case, fiduciary duty and stewarding the

08:05 beneficiaries of pension plans and sovereign wealth plans is very much in the interest

08:10 of not only the beneficiaries but those managing capital. So I think that many of the studies

08:17 that we look at within this area of social psychology, there's a prejudice test. And

08:22 oftentimes people that are neutral on the prejudice test, in other words, they would

08:28 not be determined to be racist, are on the bias test very, very positive that they won't

08:35 invest in women and people of color even if given the exact same high-performing information

08:41 of white men. So part of this is deeply psychological. And what gives me hope is that people are

08:48 willing to examine their own biases like many of our investors, investors like the Ford

08:54 Foundation and the California Wellness Foundation and other large endowments are willing to

09:00 examine their biases and look at their entire pools of capital and find and create new pathways

09:07 to capital to help enhance their overall returns.

09:10 Yeah, and so we're almost out of time, but I have a final question for you, and that

09:15 is you mentioned your training program has a horizon of a decade, of 10 years. Do you

09:21 think, is that the time frame by which you think if, you know, those who would like to

09:30 work to flatten bias or those who realize that they're leaving money on the table, the

09:35 ROI is, you know, would be better if they thought about it differently. Do you think

09:39 in 10 years from now we may see a measurable difference? Might it be sooner? What's your

09:45 best guess on when we might see that 1.4% that's being invested in women of color, women

09:53 and people of color, when will that move a little bit?

09:57 Well one of the most exciting aspects of our business model is that those that invest in

10:03 us that manage in excess of $2 trillion in capital, when they begin to look at their

10:09 entire portfolios and take the learnings from Illumine Capital and apply them respectively,

10:15 that creates a massive shift that begins to chip away at this larger $82 trillion problem

10:25 in a significant way. So one of the things that gives me hope is looking at the portfolios

10:33 and the intentionality that many of our investors are investing with and going on a journey

10:39 with us on to examine how to use our learnings and insights and apply them to their respective

10:45 portfolios.

10:46 Alright, well I like it. We are out of time now. It's really important stuff so I look

10:53 forward to following the progress and keeping this conversation moving.

10:58 Terrific, it's great to be here.

11:01 Thank you.

11:03 [End of Audio]

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