Minority-Oriented Private Equity Funds May Outperform Other Stock Indices, Study Finds

Minority-oriented private equity funds — those predominantly owned by African Americans, Latinos, and Asians — outperform widely used stock indices, even in a "bust" economy, a new report from the Ewing Marion Kauffman Foundation finds.

Funded in part by the National Association of Investment Companies, the report, Venture Capital Funds Investing in Minority-Owned Businesses: Evaluating Performance and Strategy (20 pages, PDF), analyzed changes in the investment strategies of minority-oriented funds during the early twenty-first century, following strong performance in the booming economy of the 1990s. The report found that minority-oriented private equity funds, the stock market, and mainstream venture capital funds experienced similar declines during 1999 and 2000, though the minority-oriented funds outperformed both the NASDAQ and S&P 500 stock indices for most of this period.

The report also found that minority-oriented funds, particularly those that emerged during this period, diversified their investments, focusing increasingly on investments in high-technology lines of business and in non-minority-owned businesses. Regression analysis indicates, however, that there were higher returns for funds that invested in minority-owned companies and old-economy industries. The success of new-generation funds has contributed significantly to the recovery of the minority-oriented venture capital industry from its turn-of-the-century downturn. The internal rate of return on investments initiated after 2001 and realized by year-end 2006 was an impressive 29.1 percent.

"In this study, professors [Timothy] Bates and [William] Bradford extend their pioneering work in understanding the performance of minority-oriented private equity funds by covering the years since the tech bust," said Robert E. Litan, vice president of research and policy for the Kauffman Foundation. "Their findings continue to astonish: as before, these venture firms continue to outperform the mainstream indices such as NASDAQ and S&P 500. These results bode well for continued venture support of minority-owned firms."