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.

U.S. investors’ enthusiasm over Japanese stocks at this time last year turned out to be misplaced, but the market is again on the list of potential ways to diversify. Corporate shake-ups, hints of inflation after years of declining prices, and a trade battle could work in its favor.

Japanese stocks started 2024 off strong, but an unexpected interest-rate increase in August by the Bank of Japan triggered a sharp decline that the market has spent the rest of the year clawing back. Weakness in the yen has cut into returns in dollar terms. The iShares MSCI Japan ETF , which isn’t hedged, barely returned 7% last year, compared with 30% for the WisdomTree Japan Hedged Equity Fund .

The market is relatively cheap, trading at 15 times forward earnings, about where it was a decade ago, and events on the horizon could give it a boost. Masakazu Takeda, who runs the Hennessy Japan fund, expects earnings growth of mid-single digits—2% after inflation and an additional 2% to 3% as companies return more to shareholders through dividends and buybacks.

“We can easily get 10% plus returns if there’s no exogenous risks,” Takeda told Barron’s in December.

The first couple months of the year could be volatile as investors assess potential spoilers, such as whether the new Trump administration limits its tariff battle to China or goes wider, which would hurt Japan’s export-dependent market. The size of the wage increases labor unions secure in spring negotiations is another risk.

But beyond the headlines, fund managers and strategists see potential positive factors. First, 2024 will likely turn out to have been a record year for corporate earnings because some companies have benefited from rising prices and increasing demand, as well as better capital allocation.

In a note to clients, BofA strategist Masashi Akutsu said the market may again focus on a shift in corporate behavior that has begun to take place in recent years. For years, corporate culture has been resistant to change but recent developments—a battle over Seven & i Holdings that pits the founding family and investors against a bid from Canada’s Alimentation Couche-Tard , and Honda and Nissan ’s merger are examples—have been a wake-up call for Japanese companies to pursue overhauls. He expects a pickup in share buybacks as companies begin to think about shareholder returns more.

A record number of companies have also delisted, often through management buyouts, in another indication that corporate behavior is changing in favor of shareholders.

“Japan is attracting a lot of activist interest in a lot of different guises, says Donald Farquharson, head of the Japanese equities team for Baillie Gifford. “While shareholder proposals are usually unsuccessful, they do start in motion a process behind the scenes about the capital structure.”

For years, money-losing businesses were left alone in large corporations, but the recent spate of activism and focus on shareholder returns has pushed companies to jettison such divisions or take measures to improve them.

That isn‘t to say it is going to be an easy year. A more protectionist world could be problematic for sentiment.

But Japan’s approach could become a model for others in this new world. “Japan has spent the last 30 to 40 years investing in business overseas, with the automotive industry, for example, manufacturing a lot of the cars in the geographies it sells in,” Farquharson said. “That’s true of a lot of what Japan is selling overseas.”

Trade volatility that hits Japanese stocks broadly could offer opportunities. Concerns about tariffs could drag down companies such as Tokio Marine Holdings, which gets half its earnings by selling insurance in the U.S., but wouldn’t be affected by duties. Similarly, Shin-Etsu Chemicals , a silicon wafer behemoth that sells critical materials, including to the chip industry, is another potential winner, Takeda says.

If other companies follow the lead of Japanese exporters and set up shop in the markets they sell in, Japanese automation makers like Nidec and Keyence might benefit as a way to control costs in countries where wages are higher, Farquharson says.

And as Japanese workers get real wage growth and settle into living in an economy no longer in a deflationary rut, companies focused on domestic consumers such as Rakuten Group should benefit. The internet company offers retail and travel, both of which should benefit, but also is home to an online banking and investment platform.

Rakuten’s enterprise value—its market capitalization plus debt—is still less than its annual sales, in part because the company had been investing heavily in its mobile network. But that division is about to hit break even, Farquharson says.

A stock that stands to benefit from consumer spending and the waves or tourists the weak yen is attracting is Orix , a conglomerate whose businesses include an international airport serving Osaka. The company’s aircraft-leasing business also benefits from the production snags and supply-chain disruptions at Airbus and Boeing , Takeda says.

An added benefit: Its financial businesses stand to get a boost as the Bank of Japan slowly normalizes interest rates. The stock trades at about nine times earnings and about par for book value, while paying a 4% dividend yield.

Corrections & Amplifications: The past year is expected to turn out to have been a record one for corporate earnings in Japan. An earlier version of this article incorrectly gave the time frame as the 12 months through March. Separately, Masashi Akutsu is a strategist at BofA. An earlier version incorrectly identified his employer as UBS.