Creating value from diversity

Creating a healthy and inclusive workplace is a powerful value driver for private equity firms and their portfolio companies.

Numerous studies have shown that diversity, equity and inclusion are correlated with business performance. But how exactly do private equity firms incorporate a diversity focus into their work with portfolio companies?

For Africa-focused Development Partners International, all new investments are assessed against the UN Sustainable Development Goals, of which SDG 5 aims to achieve gender equality, according to Marc Stoneham, a partner and senior lead of the portfolio management team at DPI.

“We look at both the company itself – how we can promote gender diversity at the board and management level – and at the customer base, especially how we can promote economic empowerment and financial inclusion among the customers of our financial institutions,” Stoneham tells Private Equity International. “Practically, we look at the policies and systems that can increase women’s participation in the business, as well as products targeted at women.”

DPI has, for example, invested in female financial inclusion and digital literacy programmes in Egyptian fintech company MNT-Halan. It has also put systems in place for women to rise into management roles at Nigerian business Food Concepts.

The firm has a longstanding commitment to gender equity. In fact, its 2018-vintage, $900 million African Development Partners III vehicle was chosen as the first 2X Flagship Fund, which is part of the 2X Challenge, a multilateral initiative launched in 2018 by the development finance institutions of the G7 countries. The initiative seeks to mobilise capital to support projects that empower women and enhance their economic participation.

Diversity at the C-suite and board level is also a focus area for GPs. For tech giant Vista Equity Partners, ensuring board diversity is a priority. “Software is not a very diverse industry,” Kirk Hourdajian, head of ESG and impact at Vista, said at PEI’s Responsible Investment Forum: Europe in London last November. “[The sector] has a lot of improvements to be made, so diversity is a very big focus for Vista.”

The importance of diversity on boards is being recognised across the industry. The Institutional Limited Partners Association’s latest Diversity in Action progress report found that 72 percent of GPs are promoting diversity on portfolio company boards. More than a quarter of GPs engage on board-level diversity even where they don’t have the ability to directly influence board-level appointments, and 28 percent have set minimum targets.

Mid-market European firm Triton Partners, meanwhile, zeroes in on digitalisation, sustainability and talent as the main drivers of its portfolio companies’ value-creation journey, notes Cécile Dutheil, head of human capital for the firm’s portfolio. “The first two, [digitalisation and sustainability], are critical and strategic; but they are only achievable if we have the talent and the people behind that.

“And when it comes to placing, hiring and attracting talent, we make sure that when we hire someone at the top of the company or at the top of the function, we don’t only hire those with a solid career path and a strong track record; we also hire someone who is bringing that passion for diversity and inclusion.”

“It’s not a one-size-fits-all approach”

Cécile Dutheil
Triton Partners

Dutheil admits this isn’t an easy task, noting that Triton’s exhaustive hiring process for senior leaders of its companies includes competency-based interviews, psychometric assessments and business simulations, as well as several in-depth discussions with the candidate and its deal captains and operating partners.

Triton also expects the recruitment firms it works with to provide a gender-balanced shortlist of candidates, although this is also challenging, she points out. “That’s one element of what we’re doing to find more female talent. We are also creating our own network within our portfolio companies that have thus far created strong profiles of leaders.”

In the last two years, Triton has hired four female CEOs in its portfolio companies, including at a German manufacturing business focused on the defence sector – an area in which, Dutheil notes, it is rare to find female leadership.

A flexible approach

With portfolio companies of different sizes and maturity in their DE&I journey, how then do firms engage and roll out their programmes?

Dutheil notes that the objective is to offer programmes that are adaptable to each portfolio company’s needs. “It’s not a one-size-fits-all approach. We have monthly and quarterly discussions with the senior management and have a very good understanding of their needs,” she says. There is also a DE&I workstream, which has user-friendly tools to allow them to launch their diversity and inclusion roadmap.

“They can come and say, ‘Okay, I need this and that, and I can adapt it to my corporate identity,’” Dutheil says. “It’s important to note that the company’s human resources team is simply the enabler of the toolbox. This is something that comes from the top of the company as well as the board level, with clear and measurable key performance indicators over the next 12 months.”

DPI’s Stoneham adds that sending the right messages at the board level makes an important difference. “Working with remuneration committees and HR teams on policies and practices to promote equality makes a big difference, as does making sure the business has the right policies to make it a place where everyone can succeed. This is a big opportunity: talent is scarce and being at a great place where everyone – male and female – can succeed doubles your talent pool.”

What gets measured gets done

Tracking, sharing and leveraging diversity metrics can propel firms’ efforts forward. According to the Private Funds Leaders Survey 2022, from affiliate title Private Funds CFO, 37 percent of respondents cite value-creation objectives as a driver for greater adoption of ESG monitoring and reporting, although LP pressure is the predominant driver, listed by just under three-quarters of respondents. In fact, diversity remains the most tracked ESG metric – 83 percent of private funds track DE&I data, per the 2022 survey, up from 75 percent the previous year.

“Tracking is essential because you have to have the data in order to know if you are making a difference,” Livingbridge chief investment officer Shani Zindel told Private Funds CFO, pointing to industry-wide efforts to track DE&I. “That data collection exercise has focused attention on the issue and made people more aware. I am sure we will see similar outcomes in other areas.”

DPI tracks and reports female workforce participation every quarter. Annually, it looks much harder at the underlying metrics and trends around training, development and gender mix at the board and management level, Stoneham says. More importantly, the firm also makes sure these numbers are being shared with the board.

Stoneham highlights the “need to walk the halls and stay on top of things” beyond numerical reporting. “Knowing how the relevant board committees, people, teams and so on are getting on really helps in understanding how well the company is progressing.”

Triton’s human capital team runs monthly and bi-annual review calls, alongside KPI reporting – which utilises an ESG software solution called Greenstone – and an annual survey called the Human Capital Maturity Index, which is essentially a scorecard on diversity, employee engagement and experience, and team culture. Triton recently organised a DE&I forum for its portfolio companies in the DACH region and plans to run another one focused on the Nordic countries.

However, measuring DE&I efforts is not easy work, as some jurisdictions may restrict the collection of diversity data. In addition, there’s no consensus yet on the best approach.

According to the Private Funds Leaders Survey, around two-thirds of respondents collect ESG data directly from portfolio companies, with an overwhelming 92 percent of respondents finding the data collection process challenging. A further three in 10 respondents supplement that information with data from external providers. Notably, only 5 percent report having a highly automated ESG data gathering process. The majority – 61 percent – say the exercise is fully manual.

“By the time you exit, you are hopefully leaving well-balanced senior leadership teams and boards”

Marc Stoneham
Development Partners International

Top-down support

Dutheil and Stoneham agree that top-down support is crucial for their DE&I initiatives. In fact, sharing success stories and creating a bit of “internal competition” among deal captains has proven to be a form of positive reinforcement, Dutheil says. “While our deal captains don’t like seeing when something is not on target, in the end it’s not just about the scorecard. It’s about making sure that they see that DE&I is going to help them in both team engagement and financial returns.”

Setting a good example as a firm is also helpful for getting top-down support, notes Stoneham: “Culture starts at the top and so the conversations with boards, founders or CEOs during the investment process is very important indeed. Mentoring programmes, strong learning and development, and real role models can make a big difference.”

But what happens on exit? Stoneham says the major lever is culture. “If you’ve walked the walk for the holding period, then a strong culture will be in place. That can be reinforced through the right policies and systems, and a strong remuneration committee or people committee on the board can go a long way to making sure that happens. And by the time you exit, you are hopefully leaving well-balanced senior leadership teams and boards, which is the surest way to leave a sustainable change behind.”