Tearing down the ‘cellophane wall’ in private markets

Diversity, equity and inclusion are increasingly at the forefront of many managers’ and investors’ minds, pushing them to rethink policies within their own firms and the companies they choose to engage with. Despite the advancements made in diversifying the industry so far, there is still a long way to go.

While conversations about gender equity in private markets have been gradually picking up steam, the Black Lives Matter protests opened a further discussion on racial equity. Sandra Hatugari, founder and managing director at Follett Parker, a boutique executive search firm devoted to building diverse teams, says that it “forced us to sit back and think about race”. 

Although the industry was inspired to reconsider its approach to racial diversity, it also presented what Hatugari termed a ‘cellophane wall’, where the intention was there, but the actions that followed felt rushed and became a ‘box-ticking’ activity. “What has happened in the last few years is that we haven’t taken the time to learn from the groups that we’re trying to help before jumping in and helping,” says Hatugari. 

That doesn’t mean there hasn’t been any progress, however. Devin Glenn, global head of DE&I at Blackstone, says it is encouraging to see an increased focus on the intersection of race and gender. 

“As a Black woman who has not always felt represented in the narratives around gender equity, I’m particularly sensitive to the implications of not considering the ways in which identities often overlap,” says Glenn. “Looking at the intersection of identity allows for greater room to find commonality and the flexibility to create solutions that will drive meaningful progress.”

Despite rising awareness, women of colour hold just 1 percent of investment committee roles within US and Canadian PE firms, according to McKinsey data. Hatugari believes the conversations are harder to have on the race front: “When you look at gender, a lot of people who are still at the top making decisions happen to be mostly white men. 

“They know someone who is a woman, someone who is their mother, their sister, their wife and now their children. They may not necessarily know someone who’s of a different race, who’s close to them, whom they’ve had deeply personal conversations with and whom they are connected to in some way.”

Looking within

A growing number of GPs today consider DE&I when evaluating investment opportunities, but there seems to be a consensus that such scrutiny needs to start from within. With influence over both their teams and their portfolio companies, GPs hold the power to shift the industry from its core. Indeed, Carolina Gomez, an investment director on the diverse manager research team at Cambridge Associates, says they have seen GPs that are actively thinking about the composition of their own teams, as well as assessing the networks they source from. 

“[GPs] need to focus on themselves to generate the credibility to go to someone else and say, ‘we have a toolkit, we can help’,” says Nina Kraus, a principal on Hamilton Lane’s global fund investment team. “But the beauty of that is, once you do, the governance structures in private markets are such that they can drive a lot of positive change.” 

Kraus believes that once they focus on the data, “businesses are going to perform better over the long run with more diverse thinking”. 

As part of their efforts to shift the needle on DE&I at the portfolio company level, many GPs are setting targets for board diversity. But this is “simply the first phase of a much broader mindset and cultural shift required to change equity of opportunity across the workplace”, says Tracy Ma, founding partner and chief operating officer at Hillhouse. 

Having seen the tangible benefits of this starting point, Ma says that “once set in motion, progress becomes self-perpetuating; companies experience the richness of thought and opinion that a diverse board can bring and actively seek to build diverse teams – both in the boardroom and beyond”.

Don’t ignore inclusion

Whatever stage a firm is at in its DE&I journey, it should not lose sight of the ‘I’ – inclusion. Quoting US inclusion strategist Verna Myers, Hatugari says: “Diversity is being invited to the party, inclusion is being asked to dance.” 

Although a growing proportion of private markets firms have policies in place to improve the diversity of their own hiring programmes, for example, the process does not end with a more diverse recruitment policy. Indeed, an inclusive environment that supports the promotion and retention of diverse talent could be crucial to the long-term success and longevity of a firm, particularly as LPs increasingly lean towards diverse investment teams that align with their values. As Ma notes: “Components of diversity beyond gender and race are an increasing focus for LPs.”

Promoting inclusivity must start at the very beginning, at the roots of the environment that is created, before individuals have to express the need for it. “If you build it, they will come,” says Kraus. “If you build an inclusive environment, you will have a flywheel effect starting to attract people that are different because they feel included, they will want to work for your organisation.”

Some firms utilise data and engagement tools to measure inclusivity success. At Hg, Tom Herron, head of talent acquisition and diversity and inclusion, says: “We are focused on measuring engagement and inclusion through the Peakon tool, so we can combine the diversity we have brought in with an environment our people can develop further in, creating an organisation where everyone can thrive.”

Supporting social mobility

Successfully recruiting, developing and retaining talent from diverse socioeconomic backgrounds is another challenge firms experience. Research published by the Harvard Business Review in 2021 found that US workers from disadvantaged socioeconomic backgrounds are 32 percent less likely to become managers, for example. Oftentimes, individuals from disadvantaged backgrounds might need further support in developing their talent, leading to a much narrower talent pool for the industry. 

Kraus identifies this as a ‘pipeline challenge’ when it comes to talent recruitment in the industry and says that it has “taken too much of a focus on plug-and-play hiring where we expect new candidates to have specific skill sets”. To combat this, Hamilton Lane has introduced initiatives that aim to open up a much broader pool of candidates, such as a competencies-based assessment system and an analyst development programme. 

Establishing partnerships with external organisations can often be a bridge between disadvantaged groups and opportunities. 

As Gomez notes: “GPs can partner with organisations that are working to increase diversity in the private markets. These partnerships can help GPs to identify and recruit diverse candidates, and to provide training and support to their portfolio companies.”

At Blackstone, Glenn says the firm is particularly focused on social mobility and has many programmes and training initiatives in place to support its efforts in this area. “In addition to programmes like Career Pathways and our Veterans Hiring Initiative, the Blackstone Charitable Foundation’s LaunchPad programme works with colleges across the United States to deliver entrepreneurial skill-building programmes and work-based learning that help students launch successful careers.”

Meanwhile, Herron says that, as socioeconomic diversity is difficult to measure, Hg has started capturing data around educational backgrounds across its executives and their wider families. This data found that approximately two-thirds of its investment executives went to state school or were part of the first generation of their family to go to university. “This gives some indication of social mobility diversity within our organisation, but there’s still a long way to go,” says Herron.

Investor pressure

Moving forward, LPs are expected to play a vital role in the push for DE&I improvement in the industry and in making sure GPs continue to advance in the right, inclusive direction. 

Hatugari emphasises that these conversations and demands around inclusivity are crucial to driving change. “We still wouldn’t be where we are now without the voice of the LPs collectively saying to GPs and to the rest of the industry, look, we would like you to be more responsible, to act differently.” 

GPs that fail to join the effort to drive change could find themselves losing out in the competition for both LP capital and private markets talent. “There are going to be capability differences across GPs and LPs in supporting their partners on these topics,” says Kraus, who points out that inclusivity will “evolve into a topic that will put some GPs out of business. They will not be able to attract top-tier talent if they’re not focused on this.”

“Continued focus on the role of DE&I policies in driving diversity forward across the global private capital ecosystem and beyond is critical to ensuring that the businesses of the future are representative of the diverse societies that they serve,” says Ma. 

GPs will need to look within and beyond, take time to understand the groups they are working to include and continue to have hard conversations. For a successful future with a strong emphasis on inclusivity, the process of adapting policies, accommodating every single individual, and tearing down the cellophane wall will have to become second nature.