The Sourcing Edge of Diverse Managers

The private equity industry keeps framing diversity as a values question. The data says it’s an allocation question. A recent StepStone Group analysis of emerging manager performance found that Fund I vehicles outperform later funds across multiple return measures, with around 60% of Funds I and II exceeding the industry median [1]. Separately, BCG and Cambridge Associates found that roughly 30% of transactions completed exclusively by diverse-owned firms aren’t accessed by non-diverse firms at all [2]. Most LP portfolios aren’t built to capture that kind of structural sourcing advantage, and it’s costing them.

The Emerging Manager Alpha Is Real, and It’s Concentrated

StepStone’s data tells a straightforward story. Early-fund managers outperform, and performance degrades as fund sequences advance. The reasons are largely structural. Fund I and Fund II managers have more skin in the game because they haven’t yet accumulated significant personal wealth. They’re driven by carried interest rather than management fees, and their smaller fund sizes push them toward smaller companies where valuation inefficiencies, value creation opportunities, and lower leverage create more room for alpha.

The most striking finding is about fund size. Fund Is under $500 million significantly outperform larger inaugural vehicles, with 67% delivering above-median returns compared to 44% for funds between $500 million and $1 billion [1]. This matters because diverse and emerging managers overwhelmingly operate at smaller fund sizes. They’re fishing in the exact pond where the data says the fish are biggest.

The allocators avoiding emerging managers aren’t reducing risk. They’re avoiding the part of the market where the returns are most skewed to the upside.

New York City’s pension systems have started acting on this. Their emerging manager exposure grew from $10.36 billion to $13.02 billion in fiscal year 2025, and their MWBE firms continue to beat benchmarks with an average public market equivalent spread of around 7% in private markets [3]. When one of the largest institutional investors in the country is scaling up diverse manager allocations and seeing that kind of spread, the conversation shifts from “should we” to “how much.”

Different Networks, Different Deal Flow

The performance data on emerging managers is compelling on its own. But the more interesting question for portfolio construction is why diverse managers access different returns, not just whether they do. The BCG and Cambridge Associates research found that diverse private equity and venture capital firms invest in a fundamentally different universe of deals than their non-diverse peers. Not slightly different. Structurally different.

About 30% of the deals done exclusively by diverse-owned firms never show up on the radar of non-diverse firms. These deals represent 7% of the total market [2]. For an LP trying to build a differentiated portfolio in a market where everyone’s looking at the same auctions and the same intermediated processes, that’s a meaningful wedge of deal flow that most competitors simply cannot access.

The mechanism isn’t mysterious. Private markets are network-driven. Who you know determines what you see. A team that looks different from the typical PE firm connects to different communities, different entrepreneurs, different professional networks, and ultimately different transactions. As Cambridge Associates’ Jasmine Richards put it, diversity in asset management should be viewed as a tool for sourcing different deals and accessing different networks, which can be a key driver of alpha creation.

When 98% of US assets are managed by non-diverse teams [5], the remaining 2% aren’t competing for the same deals. They’re seeing deals the 98% never will.

We’ve experienced this directly. Avante’s Women’s Network grew from 151 members in 2020 to over 950 today, spanning private equity and the broader finance industry [6]. The network started as a community-building effort because the infrastructure for women in private equity simply didn’t exist at the scale it needed to. The deal flow followed. Today, 65% of Avante’s closed deals originate through relationships built within this network [6]. That’s not a marketing number we trot out for LP meetings. It’s the actual sourcing reality of how we find our best transactions.

The economics make sense if you think about it. A 950-person network of professionals across 20+ industries generates a volume and variety of referrals that no amount of cold calling or conference attendance can replicate. When a member knows a business owner considering a transaction, or a sponsor looking for a lending partner, Avante is often the first call. These are warm introductions into situations that may never hit the broadly marketed deal process.

The Dispersion Problem Is Real, but It’s Solvable

StepStone’s research doesn’t sugarcoat the risk. While early funds outperform in aggregate, return dispersion is meaningfully wider for Fund I vehicles than for later funds. Most of the outperformance concentrates in the first and second quartiles. A poorly selected Fund I can underperform just as badly as a well-selected one can outperform.

This is actually the strongest argument for why diversity-driven sourcing advantages matter. The question isn’t whether to allocate to emerging and diverse managers. It’s how to select among them. And the selection criteria StepStone identifies, founder experience, smaller fund size, strong alignment, map neatly onto the profile of many diverse managers who’ve spent years building expertise at larger institutions before launching their own firms.

[AVANTE: Consider adding a specific example here of a deal sourced through the Women’s Network that illustrates the selection/quality point, if one can be discussed publicly.]

What This Means for LP Portfolio Construction

The industry’s standard approach to diverse manager allocation still treats it as a carve-out, a separate sleeve with its own (often lower) expectations. The data suggests this framing is backwards. Diverse and emerging managers aren’t a concession LPs make to satisfy governance requirements. They’re a source of differentiated returns that most portfolios systematically under-access.

Consider the math. If diverse-owned firms access 7% of the total deal market that non-diverse firms don’t see, and if emerging managers deliver 100 to 300 basis points of net outperformance according to multiple studies [4], then an LP without meaningful diverse manager exposure has a structural gap in their portfolio. Not a values gap. A returns gap.

An LP that treats diverse manager allocation as a governance checkbox is leaving differentiated deal flow and measurable alpha on the table.

The practical challenge is diligence. Emerging managers don’t always have the institutional infrastructure that makes LP due diligence efficient. Track records may be attributable rather than audited at the fund level. Operations teams may be lean. These are real considerations, not reasons to avoid the category, but reasons to build underwriting capabilities specific to it. StepStone’s paper outlines a practical framework for this kind of evaluation, and several large pension systems have built dedicated emerging manager programs that demonstrate it can be done at scale.

At Avante, we’ve seen the compounding effect from the other side. Being majority women- and minority-owned isn’t a credential we list for compliance purposes. It’s the reason 85% of our firm is a woman, minority, or both. It’s the reason our Women’s Network generates the volume of proprietary deal flow it does. And over 16 years, it’s contributed to a track record that speaks for itself. The diversity of our team isn’t separate from our investment results. It’s one of the reasons for them.