Fairview’s JoAnn Worth Advances Variety By Fund Of Funds

JoAnn Worth, cofounder of Fairview Capital, pioneered diversity, fairness, and inclusion in non-public fairness. Practically 30 years in the past, she and her cofounder, Laurence Morse, got down to present institutional buyers—similar to public pension funds and endowments—that expertise is in all places and investing isn’t a zero-sum recreation. If a market goes to succeed, you want competitors—different corporations doing the identical factor.

Fairview Capital has managed over $10 billion in property to turn out to be one of many largest Black-owned enterprise capital and personal fairness funding corporations. The corporate has constructed a robust observe file of success investing in various managed funds. Recognizing her contributions as a frontrunner, she was not too long ago named to the Forbes 50 Over 50: 2023 record.

A Variety-Centered Fund of Funds Begins Slowly

Within the Nineties, a gaggle realized that institutional buyers who put money into funds wanted to be educated concerning the alternative of investing in various fund managers. Worth was president of the Nationwide Affiliation of Funding Firms (NAIC) and was requested to steer the initiative to coach and show that investing in various fund managers supplied market-rate returns. At first, Worth mentioned, “No.”

However Worth believed within the want for the initiative and {that a} fund of funds was the precise car. A fund of funds holds a portfolio of different funding funds quite than investing instantly in firms. This technique would allow Fairview to lift massive swimming pools of capital from institutional buyers—pension funds, endowments, insurance coverage firms, and others—and supply knowledge on the efficiency of a number of diverse-led funds.

She additionally believed she had the talents to steer the corporate that may do that and that the timing was proper.

It took two and half years to lift the capital for the primary fund of funds. Throughout that point, Worth ran each NAIC and Fairview.

Worth recruited a cofounder, Morse, who had complementary abilities and a strategic associate with experience in funds of funds. The cofounders selected to be headquartered in Connecticut close to the strategic associate. Fairview has since purchased out the strategic associate.

Importantly, the duo had a nationwide community of relationships with various fund managers and the businesses they invested in. “It wasn’t like we needed to uncover what was on the market and what was being carried out. We already knew what was there,” mentioned Worth.

The pair started the method of screening and vetting funds to put money into. Some had been established funds. Others had been rising managers—simply beginning. Funding banks supplied a various expertise pool for buyout funds; at first, that is the place they concentrated.

A Fund Of Funds Agency Evolves

Over time, the funds Fairview invested in had been extra more likely to be VC funds. “Enterprise funds have a larger affinity towards fund of funds, versus going on to public pension funds [for capital],” mentioned Worth. Many are various rising managers. Rising managers are enterprise capital fund managers whose property underneath administration (AUM) are beneath a sure threshold and have usually raised fewer than three funds.

Some buyers wished a single-client fund of funds, and the cofounders added this to their product choices. These buyers wished particular funding methods to perform their targets.

Fairview constructed its staff, which is various in each method—together with totally different social, racial, and ethnic backgrounds, genders, sexual orientations, and many others. “It was crucial that the funding professionals of Fairview had been well-known and had entry to the broad market within the non-public fairness enterprise,” mentioned Worth. Being well-connected will increase the possibilities of being in the precise place on the proper time.

“We would like to have the ability to take a look at the broadest attainable market,” mentioned Worth. Expertise is various. One gender, race, or ethnicity doesn’t have extra expertise than one other. “If the returns are commensurate, there is no distinction!” The bigger the pool, the larger the chance.

It’s common to listen to restricted companions (LPs)—the fund buyers—say {that a} pipeline of diverse-managed funds doesn’t exist. Fairview now does periodic experiences demonstrating to buyers that there are many minority- and women-owned firms actively elevating capital. The corporate does this to:

  • Educate institutional buyers concerning the funding alternative of investing in various fund managers who put money into various firms.
  • Assist institutional buyers determine and join with women- and minority-owned corporations elevating capital.
  • Promote the expansion of minority- and women-owned companies.

Essentially the most important impediment Worth confronted and nonetheless faces is opening the minds of institutional buyers entrenched in doing enterprise in the identical method with the identical folks. The business is altering however slowly.

In 2018, most enterprise capitalists (80%) weren’t various. By 2022, that quantity dropped to 75%, in keeping with the 2023 VC Human Capital Survey.

Over the previous few years, market situations have been risky. When the pandemic hit, everybody held their breath, however funding grew. VC funding is considerably down from 2021 and 2022 ranges due to rising rates of interest and a decline in firms going public.

Acquiring capital for rising managers has turn out to be tougher. Institutional LPs are reevaluating their investments and shifting their focus to late-stage firms near a liquidity occasion like an IPO or acquisition.

Simply 19.1% of VC {dollars} had been allotted to rising through the first half of 2023 in comparison with 44.6% in 2013, in keeping with the Q2 2023 PitchBook-NVCA Enterprise Monitor.

Nonetheless, alternatives come up. A lot of Fairview’s investments have been Small Enterprise Funding Firms (SBICs). These non-public fairness funds are licensed by the SBA, which lends them low-cost, government-backed capital to put money into U.S. small companies.

Latest rule changes can enhance entry. The brand new Accrual Debentures debt construction higher matches the incoming income streams of long-term fairness investments similar to VC. “We all know from our knowledge that’s the place you discover probably the most variety within the non-public markets,” mentioned Worth.

The brand new Reinvestor SBICs primarily help funds of funds that put money into funds with an underserved focus. “We, after all, know the way vital funds of funds are to supporting small and various managers,” mentioned Worth. “It additionally looks as if the brand new guidelines will make it so there are fewer administrative burdens for managers, which additionally helps with entry. As at all times, it is going to be vital for managers to evaluate how SBA capital could match into their technique and long-term plans, because it’s not at all times proper for each technique and agency.”

Fairview’s ways could change, nevertheless it stays steadfast in its dedication to investing in variety.

How do you navigate alternatives and challenges?