Private Equity and Value Creation: A Fund Manager’s Guide to Gender-Smart Investing is a practical step-by-step roadmap for fund managers on how to strengthen gender diversity within their own firms and incorporate a gender focus into investment operations.
It combines learnings from IFC and the CDC’s experience with more than 160 fund managers and draws on best practices with a series of case studies from stakeholders across the private equity industry.
The objective of the guide is to support GPs that are keen to expand gender-focused investments by addressing how fund managers can drive the adoption of gender-smart solutions across their own firm. It also addresses how fund managers can apply gender-smart approaches to their investment operations, including during origination, due diligence, investment analysis and decision-making, deal structuring and negotiations, portfolio management and reporting and exit.
Capital raising with a gender lens has increased across private equity, venture capital and private debt vehicles: total fundraising reached $4.8 billion in 2019, up from $1.1 billion in 2017, according to a report from the Wharton Social Impact Initiative.
Private Equity International spoke to Heather Kipnis, IFC’s senior operations officer and global lead for women’s entrepreneurship, and Shruti Chandrasekhar, head of SME ventures and start-up catalyst, to find out more.
How did the guide come about and what do you hope to achieve?
Shruti Chandrasekhar: Over the past three years we have been developing our own gender investment practices within the PE and VC business. The usual thing people do is set up a practice that invests in women. For us, that wasn’t the solution because ideally what we want to see is the entire market be 50-50 across men and women. We don’t need to recreate female versions of blue chip PE & VC firms. What you want to do is have those firms become gender diverse in their leadership, employee base and investment base.
A lot of the industries are very nascent in the emerging markets. There aren’t as many PE managers in Africa or South-East Asia, for example, when compared to the developed world. So, if we can start making the change now, it’s that much easier because as the industry grows, diversity will grow with it.
This is our thought process: put out a guide to help GPs who want to make a change and help them learn different ways in which they can make changes to achieve gender balance.
Heather Kipnis: In 2019, $4.8 billion was raised by funds targeting gender, but the number of funds is so low. Compare that with $4.7 trillion of dry powder in the industry and that’s a drop in the bucket. It doesn’t align with the magnitude that’s needed to drive solutions. Ideally we see those figures start to move and move with more velocity, and our hope is that this guide will help move this.
What areas of gender-smart investing were important for you to highlight?
HK: There are two aspects of this guide that were important for us to address that had not been before. First is on deal structures. How do you structure closing gender gaps in a deal and what does that mean within legal documentation? What are the types of incentives or types of punitive measures to consider? We provided concrete examples of emerging practices we are seeing LPs and GPs put in place to allocate capital with a gender lens.
The second is about exits. How do you exit a company in a gender-sensitive way. How do you maintain efforts you’ve put into a portfolio company – whether that’s offering products or services that consider the distinct needs of women or creating new distribution channels that reach underserved women – and ensure these are in place until after the holding period? This guide introduces six principles that GPs and LPs can adopt to ensure their exits are aligned with their gender-smart investment strategies. These principles guide fund managers on how to maximise gender outcomes and mitigate the risk of losing progress on gender equality with buyers that may not (yet) be as committed.
You’ve worked on gender-based initiatives for several years now. How is this time different?
SC: We are seeing continuing interest from GPs without being prompted. The environment is different. Five years ago, I cannot imagine being at any IC meeting where a comment from an IC member is: ‘This is the least diverse team I have ever seen; do we want to support them?’ Now that is a comment that is not uncommon.
What are LPs and GPs considering to ensure outcomes within their portfolios?
SC: Right now there is a lot of intention to work towards gender balance, but that’s where the bulk of the market is, at intention, not yet at action.
There isn’t really significant negative consequence in the market [to not embracing diversity]. We’re starting to see some positive consequence. For example, if you are a GP there are emerging pools of LP funds that want to see a gender lens in the fund.
In previous research we found that there was a disconnect between LPs and GPs. We found that 65 percent of LPs said gender is a top priority, but only 25 percent of GPs thought their LPs value gender diversity. LPs cared about it and wanted it to be a part of their decision-making but somehow it wasn’t coming through to GPs.
That was around a year-and-a-half ago and that disconnect I think has changed to a certain extent. However, it’s still much more of a ‘I want to do something good and use our money to do something good’, as opposed to ‘We are not going to invest’.
You don’t see a lot of LPs or GPs making a blanket decision to invest in diverse GPs or companies. You don’t see that yet. It’s a place we would like to get to at some point but the primary responsibility for LPs and GPs is fiduciary and thinking about financial returns in their top priority.
How can GPs move beyond gathering quantitative and qualitative measurements on gender balance?
HK: We hear this phrase often: counting versus valuing. Many of the current approaches to gender-lens investing are counting women in their employee base or leadership teams. This is a necessary first step because you really can’t measure progress unless you have a baseline. What we really want to see happen is moving from counting to valuing by analysing what is behind these numbers.
What are the factors that influence gender gaps and how do those gaps influence company performance. How a company performs is obviously going to influence how a fund performs. Analysing those gaps is what we want to get to in gender-smart investing.
For example, we invested in a tuna company in the Solomon Islands and a key issue was absenteeism. You don’t think immediately that this could be a gender issue. When we started to probe deeper, we found women are not showing up for work because of gender-based violence in the home. Women were also skipping work to earn additional income elsewhere because they already had spent their money before payday. By supporting the company to roll out a financial literacy programme and support workers who faced domestic and family violence, the company stood to control absenteeism and recoup about $1.5 million in revenues. That has a direct impact on the company’s performance. That’s where we want to take the conversation. That’s the heart of gender-smart investing.
Not all PE firms have resources and dedicated teams to start their journey to become a truly equal workplace, what can they do?
SC: Our goal when we started doing trainings for our own GPs was to come up with things they can do themselves using tools that exist. There are things that can be done without a whole ton of effort. And there are lot that, with resources, can be done better.
We wanted to show you can do both. We have more than 300 funds in our portfolio. We have very large growth equity funds and we also have small business-focused funds, and the desire to focus on gender is not concentrated in one sub-segment. It’s not just in VC or large growth equity. We are seeing interest and initiatives done across the board.
Heather Kipnis is IFC’s global lead for women’s entrepreneurship and inclusive business. Shruti Chandrasekhar is head of SME ventures and start-up catalyst at IFC.