LPs zeroing in on diversity during due diligence

A vast majority of investors are inquiring about diversity at private equity firms, while some of the largest LPs have started using specific disclosure forms.

Diversity at private equity firms has become an important part of the due diligence process for limited partners, according to Jonathan Rather, a general partner at Welsh Carson Anderson & Stowe.

“It's critical to the LPs,” he said during a Monday webinar organised by the American Investment Council and the National Association of Investment Companies and sponsored by KPMG. The webinar presented best practices guidelines from the Private Equity Women's Initiative and aimed to provide a menu of tools suggesting actions firms can take to increase gender diversity.

“We just completed a fundraise and we went through increasingly detailed due diligence,” Rather said. Welsh Carson closed its latest fund, Welsh Carson Anderson & Stowe XII, in the spring on $3.33 billion, as PEI reported in June

He noted that three to four of the top 10 LPs in the fund had disclosure forms asking about diversity at the firm, but that it was on the mind of nearly all LPs. “It was a question from pretty much every investor,” he said. “These are some of the most sophisticated LPs. CalPERS, Calstrs, etc. They are very focused on the issue.”

Kelly Williams, chair and chief executive of the Private Equity Women Investor Network, added during the event that public pension plans have been at the forefront in pushing for diversity within private equity firms, mainly because of their diverse constituencies, which include former teachers, firemen and state employees. “Corporate pension plans have also been focused on this, and increasingly foundations and endowments as well,” she said. “We're even starting to see it among high-net-worth individuals.”

With such an increased focus, women-led private equity firms and those with a great proportion of women are at a huge advantage when fundraising.

“There's a great opportunity for firms started by or led by women,” added Howard Sander, founder and managing director of secondaries firm Auldbrass Partners. “That's something we've incorporated into our future planning for the firm.”

The best practices outlined by the initiative focus on four main areas: recruitment, retention, gender-related policy, and infrastructure.

The webinar speakers also emphasised the importance of retaining and promoting women within private equity firms, and stressed that the focus on diversity needs to come from top managers.

“You definitely need to have a champion, especially at the implementation stage” said Lauren Dillard, managing director and head of investment solutions group at the Carlyle Group. “You need to make sure you have senior people to be mentors. It has to start from the top level.”