By Jeremy Nobile, Crain’s Cleveland Business
There’s another new private equity firm taking root in Cleveland, but it’s the firm’s focus on diversity in its investment strategy that seems to be setting it apart in a crowded and growing industry.
The Inkwell Group launched earlier this month with base offices in Cleveland and Washington, D.C. Co-founders Marques Martin, 33, and Chijioke Asomugha, 36, will be looking nationwide for deals, but focusing predominantly on lower middle market manufacturing and service companies with up to $10 million in annual EBITDA (earnings before interest, taxes, depreciation and amortization).
Besides having strong ties to the Cleveland investment market — Asomugha was formerly an executive vice president who oversaw mergers and acquisitions at Solon-based manufacturer ERICO International Corp. and a principal investor at Cyprium Partners, while Martin’s résumé includes overseeing KeyBank’s small business team and serving as an investment professional at The Riverside Co. in its micro-cap fund — a presence here underscores the opportunity they see for finding deals in Northeast Ohio and the greater Midwest.
The challenge, of course, will be finding the best companies flying under competitors’ radar, particularly as fundraising in the private equity space has been so strong.
That’s resulting in a buildup of dry powder as more dollars chase fewer deals, Martin acknowledges, creating the seller’s market that’s prevailing today as business valuations grow.
But those are simply the challenges for any investor in today’s market.
To set itself apart from others — and capitalize on a building body of evidence showing that diverse boards and executives result in stronger companies — the firm is building a goal of diversity into its investment approach.
It’s a pitch the duo was working on as their professional work connected them together in Cleveland as each dreamed of starting their own business. While not entirely novel, it’s an approach few firms expressively embrace.
“Private equity firms are popping up every day, and they all tend to say something very similar,” said Martin, who is running Inkwell’s Cleveland base. “There is proven research supporting the case for diverse management teams and diverse boards. It helps drive value. And that’s what a private equity firm should do.
“We think some people are just leaving this lever off,” he added, “or simply not attacking it the way we are going to go about it.”
According to The National Association of Investment Companies, an industry association of diverse-owned and emerging manager private equity firms and hedge funds, an analysis of financial returns of NAIC firms between 1998-2011 showed those companies significantly outperforming the broader private equity market.
The study — their most recent analysis — showed NAIC firms achieving investment returns on average of 20.9%, compared to 11.8% for all U.S. private equity. NAIC firms also saw returning capital to investors at 160%, compared to about 67% for the broader market.
For Inkwell, when the company makes control investments, the goal will be to inject diverse people into executive and boards roles, possibly expanding boards in some cases to take on more people.
That approach would likely work better for smaller companies the firm is looking for anyhow, Martin said. In many cases, those are led by small, homogeneous teams anyway. And while that may not be an inherently bad thing, the facts are that diverse leadership in terms of race and gender generally leads to stronger businesses and, in the for-profit investment industry, better returns.
“Smaller companies tend to have incomplete management teams as it is,” Martin said. “The notion that we’re going to build their management teams tends to be less controversial to begin with. And with the ability to influence these companies versus larger companies by making some key hires at the top level, we can grow a culturally diverse culture.”
Besides being a smart strategy, the diversity is of personal importance to this team as well, Asomugha said.
“We do truly believe in this inclusive model,” Asomugha said. “It’s not just about having the best and brightest people, but having equal representation in these companies to drive value. It’s a way you can spark innovation and growth in these companies.”
With two associates, Inkwell currently includes four people. They’re currently looking for investments on an ad hoc basis.
If things go “according to plan,” Martin said, the whole team will grow to seven before the end of next year. When they’re ready to raise their first formal fund and eventually debut it within the next two years, they plan to have a team of about 20. They plan to do between two to four deals by then.
In a private equity sector ripe with players and capital, the diversity message may not only help Inkwell differentiate itself from others, but, according to the numbers, it could result in even better returns.
And that’s a message that speaks for itself.
“The reception has been warm from that group (of investors),” Asomugha said. “There’s a lot of interest in what we’re trying to do, and that’s been helpful from the fundraising standpoint as we begin our outreach. We’re excited to bring this differentiated model to the marketplace.”