Finding LGBTQ-Focused Investments Can Be Difficult. Here’s Where to Begin.

While nearly half of U.S. investors surveyed by Morgan Stanley want to invest in companies led by or making products and services for the LGBTQ community, these investments are difficult to find unless you know where to look.

Several LGBTQ-focused ETFs failed in recent years due to lack of investment, though stock investors can still put money in firms with openly queer leadership, such as Tim Cook at Apple. While opportunities for LGBTQ investments stretch across asset classes—startups attract the most attention.

For an answer as to whether this strategy can be successful, look at Grindr. One of the most prominent LGBTQ startups, the social networking app went public in 2022 and has a US$1.78 billion market cap today.

“Almost in every industry that exists, there is an LGBTQ person building [a company],” says Jackson Block, CEO of New York-based LGBT+ VC, a nonprofit addressing investment in the LGBTQ community. This means wide-ranging opportunities to invest in privately-held LGBTQ companies.

Identifying such investments often centres on two key criteria, says William Burckart, co-founder of Colorful Capital, a venture capital firm that invests in early-stage LGBTQ startups: Investors want to know whether someone in the community leads the company or if they are the target market for products and services.

Individuals and families can invest directly in companies getting off the ground or in a growing number of niche funds. Colorful Capital and Gaingels are among several firms that have formed specifically to address a longstanding lack of opportunities for LGBTQ startup founders. Others, like Backstage Capital or Elevate Capital, focus on underserved founders more broadly, including those who are LGBTQ.

According to research from StartOut, a San Francisco-headquartered LGBTQ entrepreneurship nonprofit, only 0.5% of venture funding goes to LGBTQ founders, yet they create 44% more exits, where equity investors earn capital gains through the sale or stock listing of the company, and 114% more patents than the average founder.

Colorful Capital chose to invest in seed- and early-stage funding after determining it was the “glaring gap” that needed to be filled based on conversations with LGBTQ founders, says Burckart.

Backstage Capital and Gaingels, which are syndicates with multiple investors, will support companies at several stages of development. Meanwhile, Elevate Capital, which counts 7% of founders it supports as LGBTQ, offers three funds for investors depending on what stage of investment and type of business they are interested in.

There are economic reasons to consider LGBTQ investments: Multiple studies show correlations between diversity among firm leadership and company performance as measured by internal rates of return, risk management factors, and firm valuations. “From a purely financial benefits perspective, there’s real value in beginning to embrace and integrate that kind of diverse thinking,” Burckart says.

Gaingels, whose members have invested more than US$800 million since 2019, principally invests in health, fintech, and enterprise software, according to Dealroom.co. Recent deals include taking part in a post-seed, series A funding round for San Francisco-based social care platform Grayce and a seed-funding round for Menlo Park, Calif.-based financial community platform AfterHour.

More than 70 unicorns—firms that have reached US$1 billion valuations—have been funded at different stages by Gaingels. These include Seattle-based, goal-oriented telehealth platform Ro and Dapper Labs, a Vancouver-based digital games and entertainment firm.

Block, whose organisation has a mission to educate, train, and mobilize 10,000 LGBTQ and ally investors by 2030, suggests wealthy investors enter the venture capital fray by becoming a limited partner in a fund. This allows investors to get involved with less risk and comparatively steady return expectations compared to angel investing.

Geographically, many LGBTQ companies attracting investment are North American, though regional funds exist in Europe and Latin America, Block says.

For wealthy families, investing in LGBTQ-related businesses can be a strategy to engage the next generation, as products and investment strategies that advance LGBTQ equity and inclusion are in high demand among younger investors (56% of millennials and 67% of Gen Z, according to Morgan Stanley). This is unsurprising, given that Gallup polling suggests more than one in five Gen Z adults and one in 10 millennials identify as LGBTQ.

Morgan Stanley’s Institute for Sustainable Investing estimates that those interested in LGBTQ investments control about one-third, or US$20 trillion of U.S. wealth managers’ assets under management. With the impending generational wealth transfer, the bank says control of interested investors could grow to nearly half of the assets under management at all wealth managers. Block expects that creating opportunities for LGBTQ fund managers will also help grow LGBTQ investments, and will create a “natural pipeline” for them to find roles with major investment banks.

In identifying investments, Morgan Stanley offers strategies that screen-out certain companies, says Emily Thomas, head of Investing with Impact, Morgan Stanley Wealth Management, the bank’s platform featuring funds and other investment vehicles for values-based investing.

“Per our survey, 76% of investors interested in LGBTQ impact objectives are also interested in the ability to exclude companies that don’t explicitly include protections for LGBTQ people in their labor rights policies,” Thomas says.

There are also companies owned or run by individuals with family and friends who are LGBTQ and want to make sure their company helps support and gives back to the community.

Recently, a banking executive spoke about their experience being raised by lesbian parents at an LGBT+ VC ally event. Morgan Stanley reports 76% of heterosexual investors with an LGBTQ household member want such investment options, more than the general population.

The biggest barrier to finding LGBTQ investment strategies is being able to gather data on the community, Thomas says.

Individuals can have reservations about sharing information regarding sexual orientation or gender identity—54% of LGBTQ individuals in the U.S. live in areas without state-level protections. Ongoing stigma against the community also prevents some people from openly identifying as LGBTQ.

“Only with more data can we know the extent of inclusion in, and exclusion from, the structures that make up the foundation upon which the U.S. economy is built,” Colorful Capital said in a May report.

(There are forces trying to change this. Earlier this year, the U.S. Census Bureau’s monthly American Community Survey announced it is looking into asking about sexual orientation and gender identity.)

Because of the sensitive nature of data and laws around personally identifiable information, there isn’t readily available data on the percent of employees who identify as LGBTQ or what representation looks like at senior levels, unlike for gender diversity. Comparably more data is available on corporate policies on LGBTQ matters, so some asset managers use that to identify companies as investments, Thomas says.

“For example, [an] asset manager can tilt portfolios toward companies that offer domestic partner benefits to same-sex couples,” she says. Other strategies could include screening for companies that offer LGBTQ diversity training or have not faced Equal Employment Opportunity Commission disciplinary actions. Investors can also use benchmarks such as the Human Rights Campaign Corporate Equality Index, which scores about 1,400 publicly and privately held firms on several areas of LGBTQ policies and practices, including whether they offer domestic partner and transgender-inclusive benefits,

Institutional Allocators for Diversity, Equity, & Inclusion, a nonprofit group of asset owners aiming to promote those principles within investment management, has a publicly available diverse manager database, which allows funds to self-report LGBTQ affiliation, Thomas says.

Tuesday’s retail sales report could be the scrap of evidence that tips the balance as Federal Reserve officials decide how much to cut interest rates on Wednesday.

It is practically a given that the central bank will reduce rates. Inflation has fallen to its lowest point since February 2021, giving the Fed more flexibility to focus on the second component of its dual mandate—achieving maximum employment. Although the labor market remains resilient, the most recent two jobs reports have been weaker than expected, putting some pressure on the Fed to loosen monetary policy.

The question now is by how much rates will fall—0.5 percentage point, or 0.25 point? The indications from interest-rate futures are split , recently favoring the more aggressive half-percentage-point decrease.

Andrew Hollenhorst, an economist at Citi , leans toward the likelihood the Fed is more cautious on Wednesday, cutting rates by 0.25 percentage points. But he notes that it it is a close call that depends on the dynamics of the bank’s rate-setting committee and the strength or weakness of Tuesday’s retail sales report.

A positive surprise would suggest that both consumers and the labor market remain resilient, paving the way for a more modest cut. If the report comes in well below expectations, however, Fed officials may grow concerned that a weaker labor market is weighing on consumer spending, which could lead to a bigger cut, Hollenhorst added.

Louis Navellier, founder and chief investment officer of the money-management firm Navellier agrees. “In theory, if the August retail sales report is horrible, then a 0.5% Fed key interest rate cut may be forthcoming on Wednesday,” he said.

Economists are expecting retail sales will decline by 0.2% in August from July, according to FactSet. They jumped by a surprising 1% in July .

Lower gasoline prices and car sales will likely drag the headline number lower. Indeed, stripping out car and gas sales, retail sales are projected to increase by about 0.3% month over month.

Yet there is growing concern that even excluding autos and gas sales, the sales figure will be soft. While spending was remarkably strong in July, the Fed’s latest Beige Book flagged that consumer spending ticked down in August, points out Bill Adams, chief economist for Comerica Bank . Many retailers, particularly those catering to lower-income shoppers, have warned that Americans are being cautious and exceedingly choosy about what they are buying and where.

The impact of the retail sales report will likely extend beyond the immediate rate cut. The insights it contains about U.S. consumers will also factor into the Fed’s quarterly update to its Summary of Economic Projections, containing officials’ latest forecasts for the U.S. economy, inflation, and near-term interest rates.

The so-called dot plot , which charts the individual interest-rate projections of the seven members of the Fed’s board of governors and the 12 regional Fed presidents, is always closely watched as investors try to chart the Fed’s future actions.

Hollenhorst believes the median dot showing where rates will be at the end of 2024 should show “at least” 0.75 percentage-point of cuts, factoring in 0.25 point at each meeting through the end of the year. But it is likely that officials will leave the door open for more cuts in case data on the job market or consumer spending sour faster than expected.