Friday Letter: Too few key women

Performance-driven private equity firms should address gender inequality within their partnerships now

Let’s start with an understatement: the corporate world has not set an impressive example when it comes to gender equality. The year 2015 may be approaching fast, but if the proportion of women working in senior business roles is anything to go by, we might as well still be living in the 1970s – or, if we’re going to be private equity-specific about it, further back still.

According to a recent report by New Financial, just one in five board directors at European financial companies or institutions are women. Private equity comes out as the worst performer: just 9 percent of senior management, directors, partners and chief executive offers were female, the report said. While pension funds did a lot better compared to private equity, female representation at the senior level was still only 27 percent.

This is perplexing. Given that women outnumber men in global university attendance and graduation rates according to several studies, how come women remain so few and far between – especially in an industry whose influence is stretching to so many levels of society?

At PEI’s Women in Private Equity Forum in London this week, one big discussion point was that the pipeline of new female talent coming into the industry is not looking good. And because there are fewer women at a junior level to begin with, the chances of them reaching the top remain slim.

There are many reasons for why this is so, but the most important question for the industry to engage with is this: does it matter? Will a private equity firm be a better private equity firm if more women are involved in running it? And do investors care?

Some clearly don’t, is the answer to that last question: “We look at the team dynamics and whether a particular team will deliver, but we don’t necessarily look at gender,” one European fund investor told PEI this week. Ultimately, LPs are after a diversified portfolio and market-beating returns.

However, some of the world’s leading institutions are pushing for change. In September, a consortium of institutional investors called The Thirty Percent Coalition and led by The California State Teachers’ Retirement System (CalSTRS), reached out to 100 companies in the Russell 1000 Index with a lack of women board directors, urging them to embrace gender diversity. CalSTRS hasn’t specifically mentioned private equity, but it wouldn’t seem at all surprising if it did so soon.

Meanwhile more and more data is emerging which suggests that businesses with gender-balanced management teams do achieve better results. A study from Catalyst found that companies with the most women board directors outperformed those with the least by 16 percent in terms of return on sales, and by 26 percent in terms of return on invested capital by 26 percent. Imagine a similar study conducted for private equity: it would be fascinating to see how buyouts led by female partners compare to investments led by men.

Elsewhere, McKinsey has found that the 89 European-listed companies with the highest proportions of women in senior leadership positions and at least two women on their boards outperformed industry averages for the Stoxx Europe 600, with a 10 percent higher return on equity, 48 percent better operating results, and 1.7x faster stock price growth.

On the whole, private equity firms don’t seem to pay much attention to these kinds of insight. But there are exceptions: Karmijn Kapitaal, a Netherlands-based private equity firm run by three women partners, is so convinced that diversity leads to better results that it has based its entire investment strategy based on it. Karmijn will only back a management team if it is made up of at least 25 percent of either gender.

This kind of thinking is unlikely to become dogma in private equity any time soon. But in light of the hard data being surfaced, GPs would seem well advised to address the gender gap in their partnerships: the notion that doing so now will likely create a competitive advantage is becoming more difficult to ignore.