Is now finally the time to welcome diversity and inclusion to private equity?
Posting date: 24 June 2020
In the midst of the global Covid-19 pandemic and mass Black Lives Matter protests, the world feels like it’s on the brink of something enormous. Major change is ahead, and we can expect some of that change to impact the way we work, not to mention the jobs that are available to us. The challenges and opportunities Covid-19 is presenting are starting to emerge, while societal and structural change resulting from anti-racism activity is expected – and hoped for – in the near future. So, what does that mean for private equity? With progress in the air, could now finally be the time for the industry to become more diverse and inclusive?
A history of diversity and inclusion within private equity
Private equity has long been thought of as a man’s game, attracting and retaining women in low numbers. In fact, women hold just 10% of the senior positions within private equity and venture capital firms globally, which highlights the underrepresentation of female decision makers in this industry.
A 2020 EY survey shows that while diversity and inclusion is a top priority for many in the industry – 58% of firms with more than US$2.5bn in assets have set gender and ethnic diversity targets – the activity and outcomes connected to these targets can often be lacking. This is clear in the 40% of fund managers who are falling behind on their diversity targets, and 60% of mid-sized managers who report the same.
Why does the industry need diversity and inclusion?
There is an abundance of research to suggest that diverse teams generate business benefits. Within private equity and venture capital specifically, Oliver Wyman reports that gender balanced teams have higher returns, with 20% higher net IRR. Within portfolio companies, gender balanced teams also have higher valuation increases.
In addition to the profit margins is the flow of ideas and innovation that more diverse teams can produce. A focus on diversity and inclusion can create more welcoming work environments with high-functioning, cohesive teams that bring unique perspectives and experiences to the table. Within private equity, this can only be a good thing.
How will current events impact the future of the market?
The death of George Floyd and corresponding global outrage has led to many companies examining their own conduct and treatment of black employees. Private equity is not exempt, with three-quarters of private equity firms taking proactive steps to increase diversity, according to EY. The market must now ask itself what it can do to help accelerate change and progress towards racial justice, not only to create more inclusive workplaces that better reflect the general public, but also to drive business changes and improvements.
Meanwhile, Covid-19 has ushered in entirely new ways of working, with many business leaders now considering the introduction of permanent remote working solutions and more flexible conditions for employees. This has the potential to allow a much broader candidate pool to have access to roles (and indeed, for business leaders to access a much bigger pool of candidates). Professionals who have previously been limited by where they can work, how they can get there and how long they can be in an office environment may be welcomed into a private equity industry where home working is encouraged and schedules are flexible to suit individual requirements. This will hopefully allow private equity to be a more accessible industry for those with disabilities, parents, caregivers and anyone else who cannot get to or be in an inner-city office every day. Given that 73% of disabled workers in the UK have stopped working due to disability or health conditions, a more flexible, remote-friendly approach to work - and certainly private equity – will be welcomed by many.
Companies taking the right steps
While many firms are currently pledging their support for black lives and diversity and inclusion, the true test will be which organisations focus on actionable outcomes.
Carlyle’s chief inclusion and diversity officer Kara Helander told Private Equity News that the industry can drive change by using its influence and role as investors. After tracking diversity in the boardroom of its portfolio companies, Carlyle has found the number of boards meeting its goal of having two or more diverse members has risen from 38% in 2016 to 77% in 2020. Of the companies promoting these changes, the average annual earnings growth was 12% greater than companies that lacked diversity.
Other PE firms putting diversity at the top it their agendas include Blackstone, which has initiatives including recruiting from historically black universities and colleges and using neuroscience and artificial intelligence to remove bias from the recruitment process, and Advent, which partners with Seizing Every Opportunity to mentor and train professionals from the BAME community.
The conversations happening currently around diversity and inclusion are the first step to what will hopefully be a turning tide for private equity. Business leaders should now be considering more transparent salary ranges across each open role to help close the gender and ethnic pay gap, as well as looking at sponsor and mentor opportunities and setting proportional targets for inclusion and diversity.
Leads can also be taken from the ILPA’s Diversity and Inclusion roadmap for the PE industry. The BVCA has a strong focus on diversity and inclusion and offers resources and community engagement, while Level 20 group promotes gender diversity in European private equity and Diversity VC works with entrepreneurs, investors and universities to create an industry free from bias.
As conversations continue around the future of the workplace – as well as ongoing anti-racist movements – we can expect to see more change ahead for private equity. Let’s hope more diversity and inclusion is part of it.
At Hanover, we know that the diversity and inclusion case is more than just a gender issue. As skills shortages challenge nearly every industry, the case for a more inclusive candidate pool is stronger than ever. If you’re interested in talking about the private equity market or diversity and inclusion in any of our sectors, we’d love to hear from you. Contact us to start a conversation.