There are currently around 10,000 private equity firms globally, responsible for more than $3.9 trillion in assets under management. More than 4,000 UK companies and almost 19,000 US companies are private equity-backed.
It is clear, then, that private equity’s ability to reduce gender and racial inequality by embracing diversity, equity and inclusion in its own ranks – and in the businesses it owns – could have a profoundly beneficial impact on the world in which we live.
“Although often targeting mid-sized companies, private equity has the potential to influence the global business community, given the sheer number of GPs and underlying companies it invests in,” says Raphaelle Koetschet, head of Caisse des Dépôts’ funds investment team. “That influence is only going to increase as private market assets under management continue to rise.”
The asset class appears to be slowly waking up to this reality. The latest Human Capital Survey by the US National Venture Capital Association found that 43 percent of firms have at least some form of diversity strategy, compared with just 32 percent two years ago. The data also reveals that a deliberate and structured approach to tackling DE&I is working. Put simply, firms with formal strategies have greater numbers of women and people from ethnic minorities than those that do not.
“Private equity has had its wake-up call on diversity and inclusion,” says Dörte Höppner, chief operating officer at Riverside. “The industry as a whole now understands that it has to do more to become truly diverse and inclusive.”
There is no doubt, however, that private equity lags its public market counterparts. At the start of 2020, around 20 percent of managing director level executives at private equity firms in the US were women, according to McKinsey, compared with 30 percent in the rest of corporate America. Private equity also trails when it comes to ethnic diversity. Woefully, just 1-2 percent of investment professionals are Black.
Maryam Haque, executive director of Venture Forward, a not-for-profit organisation launched by the NVCA to promote inclusivity, says: “Low turnover at firms, long investment cycles, financial risk, inherent industry failure rates and a network-driven ecosystem have made entering and succeeding in private equity a challenge for anyone, but particularly for those from historically under-represented groups.”
The drivers behind private equity’s newfound determination to overturn its monocultural heritage are clear. Not only is this palpably the right thing to do, but diversity, equity and inclusion are now essential for any firm’s success and longevity.
It is hard to ignore the mounting evidence that diverse teams are better able to manage risk and create value through smart decision making. Limited partner commitments increasingly hinge on whether an investment team mirrors wider society.
Management teams at prospective target companies are also unlikely to lean towards firms that fall short on diversity – particularly as GPs’ investment appetites shift from traditional industry and towards businesses in younger, more diverse sectors, such as technology and healthcare. Evidence of a positive correlation between diversity and returns is proliferating: in a 2019 study, Rock Creek Group found that gender-balanced teams produced a 20 percent higher net IRR.
“Your investors don’t just want you to make money for them anymore; they want you to make money for them while doing good,” says Wol Kolade, managing partner at Livingbridge and co-founder of the 10,000 Black Interns initiative. “The entrepreneurs and business owners you want to back also won’t be interested if you present them with a row of white, middle-aged and middle-class men from Oxford and McKinsey. That just isn’t the way to guarantee success.”
Of course, no-one is saying that any of this is easy. DE&I is not something that can be achieved overnight. “The private equity industry has historically lacked diversity and performance remains poor, especially within investment teams and executive positions,” says Ardian’s chief operating officer Jérémie Delecourt. “However, there is no longer debate about whether our industry needs to boost inclusion and diversity in the workplace. The question is more about how this can be achieved, both rapidly and effectively.”
The answer to that question begins, but does not end, with identifying and attracting diverse talent. “We are competing with the large advisory firms, which spend millions on recruiting high-calibre candidates,” says Höppner. “Since most private equity firms are smaller, the industry is not top of mind for many students or young professionals. Changing this will require a concerted effort from private equity firms, investors and industry associations, as well as groups such as Level 20.”
Private equity firms have been proactive in evolving their recruitment strategies. This starts with opening up the pipeline, either with internal outreach and internship programmes or by partnering with the myriad organisations – ranging from Girls Who Invest to SEO, TWIGO and the Robert Toigo Foundation – that have been created to support entry-level diverse hiring.
Next, firms have to get tough on recruitment companies. “You have to make it very clear to your partners that you want a diverse list, every single time,” says Johnathan Medina, head of inclusion and diversity at Apax Partners. Triton Partners, for example, mandates gender diverse shortlists, while making a conscious effort to include gender-neutral language in job descriptions.
“Triton’s approach to recruitment is consistent, with every candidate going through the same application process and receiving an equal opportunity,” says Amanda Tonsgaard, head of investor services and communications at the firm. Instilling objectivity into the recruitment process has proved key.
“Private equity tends to be more qualitative than quantitative in its benchmarking,” says Anne Philpott, principal on the private equity and junior capital solutions team at Churchill. “You hear people talking about ‘fit’ or ‘feel’, but these are touchy-feely metrics that make it harder for women and minorities to make headway. For recruitment to be inclusive, requirements must be clearly defined.”
Objectivity is equally important when it comes to ensuring equitable career progression. Firms must clearly state the requisite hurdles for bonuses or promotion to eliminate unconscious bias. Private equity is also increasingly cognisant of the need to foster an inclusive culture, to ensure team members are motivated and productive and, of course, to ensure they do not jump ship.
Inclusivity measures include employee resource groups for specific communities, ranging from women, ethnic minorities, LGBTQ+ team members to those with military backgrounds. Mentoring schemes in various guises are also increasingly common, as are open dialogue forums such as Nuveen’s Courageous Conversations. But creating a culture that is deeply and genuinely infused with a DE&I mindset, starting at the top, is most important of all.
Blackstone’s global head of compliance and co-chair of OUT Blackstone, Marshall Sprung, points to the impact of having chief operating officer Jon Gray highlight the firm’s Pride activities in Monday morning meetings: “The truth is you can bring diversity all day long, but if people constantly feel bothered or not included, they will ultimately leave.”
Impact investing and DE&I
Although private equity is not known as a beacon of diversity, the burgeoning impact investment space is very different, according to Nuveen managing director and co-head of impact investing, Rekha Unnithan.
“In fact, impact teams like ours can often be more diverse than the general population,” she says. “That is a function of the experiences and passions that have brought people into the sector.”
Impact strategies typically focus on climate change mitigation or income inequities, and a DE&I component to achieving those goals is increasingly the norm. Nuveen itself is taking a more intentional approach to DE&I by investing in businesses designed to reduce inequality and improve environmental outcomes. “We don’t go out looking for companies run by women or minorities and measure our impact that way,” says Unnithan. “But we see driving a DE&I agenda as one way to improve both the financial performance and impact performance of the businesses we back.”
Nuveen always takes a board seat and because two out of three of the senior private equity impact team are women and women of colour, the investment itself can already have a transformational effect. “We may often be the first women to join that board, so we can bring a different perspective,” says Unnithan. “We then continue to push for improvements around pay equity, skills development and a diverse and inclusive workforce throughout our holding period.”