SOURCE: Kauffman Foundation

September 11, 2008 11:01 ET

Minority-Oriented Private Equity Funds May Outperform Other Indices, According to Kauffman Foundation Survey

Study Analyzes Minority-Oriented Funds' Performance During Economic Downturn

DETROIT, MI--(Marketwire - September 11, 2008) - Data from a new survey of minority-oriented private equity funds suggest that, even in a "bust" economy, minority-oriented funds outperform widely used stock indices. Minority-oriented funds focus their investments on firms predominantly owned by African Americans, Latinos and Asians. The study was released today at the National Association of Seed and Venture Funds 2008 Conference in Detroit, Mich. The report, funded in part by the Ewing Marion Kauffman Foundation, analyzed changes in minority-oriented funds' investment strategies in the early 21st century, following strong performance in the 1990s during a booming economy.

According to "Venture Capital Funds Investing in Minority-Owned Businesses: Evaluating Performance and Strategy," minority-oriented private equity funds, the stock market and mainstream venture capital funds experienced similar declines during 1999 and 2000. Comparisons, however, suggest that the minority-oriented funds outperformed both the NASDAQ and the S&P 500 stock indices for most of this time period.

Minority-oriented private equity funds' strong performance in the 1990s drew increased attention and additional funding to this source of capital for minority-owned businesses. The sharp drop in the surveyed funds' returns in 2000 is especially significant because their investment volume was at an all-time high during that year, fueled by substantial growth in funding from public pension funds, which had become a significant source of capital by the late 1990s.

"In this study, professors Bates and 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 & Policy, 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."

The study also showed that minority-oriented funds, particularly the newer generation of funds that emerged during this period, diversified their investments, focusing increasingly on investments in high-technology lines of business and in nonminority-owned businesses. Regression analysis indicates, however, that there were higher returns for funds that invested in minority-owned companies and old-economy industries.

"In the past, venture capital provided to minority firms were concentrated in firms in older, more established lines of business because this is where the deal flow came from," said William Bradford, professor of finance at the University of Washington and one of the study's authors. As the minority-oriented venture firms found more high-technology deals, their returns have since slipped, and thus mimicked their more mainstream counterparts. Yet, notes Bradford, "The minority-oriented venture firms have still managed to outperform widely used stock market benchmarks. Our analyses show that, meanwhile, the new generation of minority-oriented funds has emerged as more successful investors after controlling for other factors that affect performance."

The success of newer-generation funds has contributed significantly to the fact that the minority-oriented venture capital industry already is recovering 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.

For more information about the study, please visit www.kauffman.org.

About the Kauffman Foundation

The Ewing Marion Kauffman Foundation is a private nonpartisan foundation that works to harness the power of entrepreneurship and innovation to grow economies and improve human welfare. Through its research and other initiatives, the Kauffman Foundation aims to open young people's eyes to the possibility of entrepreneurship, promote entrepreneurship education, raise awareness of entrepreneurship-friendly policies, and find alternative pathways for the commercialization of new knowledge and technologies. It also works to prepare students to be innovators, entrepreneurs and skilled workers in the 21st century economy through initiatives designed to improve learning in math, engineering, science and technology. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo. and has more than $2.4 billion in assets.

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