PE fund targets diversity, governance at small companies

Mill Road Capital is applying a 'progressive private equity' strategy in its latest fund.


Boutique private equity shop Mill Road Capital is applying its expertise in small-cap value investing to carve out a governance-focused niche that falls between traditional activist investing and passive index funds.

The Mill Road Progressive Governance Fund, which opened to accredited investors this month, has a mandate to invest in publicly traded companies with market capitalizations from $500 million to $2 billion with the goal of affecting diversity in the boardroom and executive ranks.

“If you are an investor in public companies and you care about governance, operations and diversity, there aren’t any alternatives out there for you,” said Tom Lynch, Mill Road founder and senior managing director.

Mill Road is a 15-year-old Greenwich, Connecticut-based firm with nearly $1 billion invested across three existing funds and it has a “long track record of being able to work with companies to get onto their boards and improve governance,” Lynch said.

“We label ourselves as progressive private equity,” he added. “We take the companies private or do structured transactions with them to achieve board diversity and governance.”

The fund, which will not make its first investments until later this year after it reaches the $500 million range, is described by Lynch as a fitting between the more adversarial activist investing strategy and passive investing efforts that send out positive messages but lack the infrastructure to create real change.

“You could invest in an activist fund, but they tend to be short-term oriented and adversarial,” he said. “And the passive index funds have aspirations, but don’t have a cost structure to do it. The leadership of places like BlackRock, Fidelity and State Street clearly care about operations and governance and diversity, but it’s very difficult for them to do anything about it because they’re passive.”

According to Lynch, “throughout our history, 90% of our board seats were achieved with the consent of management and the boards.”

“It is a preposterous situation now that the only shareholders who engage companies do so in an antagonistic and adversarial way,” he added. “And with passive index funds becoming the largest voting bloc in public equities, shareholders now more than ever need a skilled, engaged and aligned partner on the board to ensure the highest standards of operational and social governance are upheld.”

In support of that goal, James White has joined Mill Road as a managing director and the head of board governance and diversity initiatives.

White comes to Mill Road with a long track record of combining highly profitable returns with responsible ESG policies. As a former chief executive at Jamba Juice, White led a successful turnaround of the business.

During White’s tenure, the share price increased by more than 300%, while the company embedded the values of diversity and inclusion into its culture and tripled diversity in its highest ranks, according to a statement from Mill Road.

White has long been an outspoken advocate of diversity in the boardroom. He recently wrote in the Harvard Business Review that changing company culture and internal systems, giving diversity officers more control and authority over human resource systems, and encouraging merit-based diversity at the highest levels of a company will not only build a culture of diversity and equity, it will also improve the bottom line.

“Study after study has shown that racial and ethnic diversity in both the executive suite and the boardroom not only enhances company morale from top to bottom, but also improves financial performance, encourages innovation, and brings in new perspectives that lead to new opportunities,” White said.

In addition to focusing on smaller companies, the new fund will have a tilt toward value stocks, which are currently trading near 50-year lows, Lynch said.

“Small companies are generally more imperfectly priced than large companies,” he said. “These smaller companies also aren’t well-covered, so they feel less pressure about areas of diversity.”