A PE imperative: DE&I in the workplace

June 2021  |  COVER STORY  |  PRIVATE EQUITY

Financier Worldwide Magazine

June 2021 Issue

Diversity, equity and inclusion (DE&I) in the workplace is often consistently inconsistent across the corporate world. Some businesses treat DE&I as simply buzzwords to be trotted out during a tick-box exercise, while more enlightened entities recognise the benefits of such traits, especially on their bottom line.

Among the businesses with much to do to improve their DE&I posture are those operating in the private equity (PE) industry. By way of attestation, as far as the British Private Equity & Venture Capital Association’s (BVCA’s) ‘Diversity & Inclusion Survey 2021’ is concerned, in the UK and Europe, DE&I is on a low rung across the PE fraternity.

Focusing on gender diversity and the underrepresentation of people from different ethnic groups, the BVCA survey – based on data gathered from 186 PE firms in the UK and Europe – notes that, while progress has been made, the number of senior women working in PE investment roles remains low at 10 percent. In terms of ethnicity, 11 percent of respondents across the PE industry are Asian, 3 percent are Black/African/Caribbean, 2 percent are Mixed/Multiple ethnicities and 5 percent are Other.

When gender and ethnicity are combined, the BVCA’s analysis reveals that women from ethnically diverse backgrounds represent only 9 percent of the firms sampled, across all grades and functions. In senior roles, only 3 percent of employees are women from ethnically diverse backgrounds, across both investment and non-investment roles, with Black women accounting for less than 1 percent of senior roles.

Across the rest of the globe, the picture is very much the same. EY’s ‘2021 Global Private Equity Survey’ – which features the views and opinions of executives and heads of finance at PE firms – also highlights the lack of diversity across the industry, noting that firms still have much to do to address the composition of their talent pool with regard to gender and underrepresented minorities.

From a gender perspective, the EY survey found that 30 percent of PE firms’ employees in the front office are women, while the same percentage is the case for women in back office roles. As far as underrepresented minorities in both the front office and back office are concerned, 75 percent of survey respondents indicated that less than 10 percent of their front office comprises underrepresented minorities, while 60 percent stated minorities accounted for less than 10 percent of their back-office staff.

“Without the diverse perspectives that people from various identities and backgrounds bring, PE firms are leaving innovation and profits on the table,” says Aubrey Blanche, director of equitable design, product & people at Culture Amp. “We are in a rapidly globalising world where it is not only a financial imperative but a moral requirement for leaders to champion this work.”

Waking up to virtues

While many PE firms clearly lack sufficient gender and ethnic representation, there is considerable evidence that the industry as a whole is waking up to the virtues of DE&I, which go beyond purely financial advantages. This realisation, as well as being morally and ethically sound, can provide additional levers for PE firms’ outperformance in the years ahead.

“Traditionally, the PE industry was viewed as an exclusive and homogenous club, driven by profit rather than people,” states Srikumar T.E., global head of fund solutions and member of the diversity & inclusion council at the Apex Group. “This view, however, is being disrupted by the influx of new entrants in this space. Abundant evidence demonstrates that only with diverse perspectives can PE firms overcome ‘groupthink’, make better investment decisions and ultimately improve returns for investors.”

Certainly, numerous studies suggest the alternative investment community’s attitude to DE&I is changing. According to Preqin’s recent ‘Future of Alternatives 2025’ survey, while some respondents remain unconvinced, the majority recognise that diversity of gender, experience and cultural backgrounds in the workplace is a powerful defence against groupthink, can sharpen a team’s decision making ability and improves investment outcomes.

Furthermore, research by Oliver Wyman – ‘Moving Toward Gender Balance in Private Equity in Emerging Markets’ – found that gender-balanced teams tend to have higher returns, with 20 percent higher net internal rate of return (IRR). Such data is persuading the PE industry that an inclusive culture leads to better decision making and ultimately improves performance.

According to Cachet Prescott, founder and chief executive of Shift Matters, greater DE&I in the workplace equates to: (i) increased belongingness, which can positively impact employee experience, trust, loyalty and productivity; (ii) increased diversity of thought, to avoid limited or biased thinking by capitalising on a multitude of experiences; and (iii) better representation of the world at large, which affects how customers experience an organisation. “These ultimately affect a firm’s potential impact,” she adds.

“Diversity and equal opportunities are no longer buzzwords or optional extras in the workplace,” says Sasha Graham, a senior consultant at the Equality Group. “Employers cannot afford to ignore them because they affect the bottom line. Study after study has shown that diverse teams improve financial results.” Indeed, the Equality Group’s own ‘Inclusive PE & VC Index 2021’ bears this out, stating that firms have recognised the stark lack of diversity in their companies and are making efforts to improve inclusion.

Adapting recruitment

Given the apparent paucity of DE&I across the industry, PE firms need to adapt their existing recruitment strategies to appoint and promote those currently underrepresented. A key challenge here is the need to flip the switch on many firms’ historically homogeneous mindsets.

“At the recruitment stage, increasing access and visibility to underrepresented talent is necessary to create a talent pool of diverse employees,” suggests Mr T.E. “One approach that PE firms can use is to implement systems and training that increase objectivity in selection and decision making throughout the recruitment process.

“However, assembling diverse, equitable and inclusive talent pools goes beyond recruitment and also requires the industry to think about how to improve the development and retention of diverse individuals,” he continues. “PE firms, typically, are long-term investors, holding portfolio companies for three to five years or longer before achieving a return – and they should view their investment in a diverse workforce in a similar way.”

In the view of Ms Graham, removing structural bias is one of the key challenges PE firms need to overcome to ensure certain groups are hired and promoted. “Debiasing the recruitment process by applying a multi-method assessment approach is the first step to ensuring that you have a fair recruitment process,” she believes. “Firms also need to work outside their usual network to ensure they are reaching out to a wider pool of people. They should also be aware of the messages they are publicly sharing.”

According to the BVCA survey, in order to progress, the PE industry must: (i) focus on recruiting and retaining from the best and widest talent pools; (ii) support the retention and progression of people of all genders, ethnicity and backgrounds, for example through mentoring and sponsorship; and (iii) continue to collect and analyse data so that progress can be measured.

“We need to be more demanding throughout the recruitment process – making recruitment partners work harder to deliver a more diverse shortlist of candidates,” suggests Nicola McQuaid, director at NorthEdge Capital. “We have also found that getting more of our people involved in the recruitment process guards against ‘groupthink’ or unconscious bias. We need to take some responsibility for engaging with and building a more diverse long term talent pipeline in the PE industry.”

‘Tone at the top’

To advance DE&I efforts across the PE industry, it is essential that firms’ upper echelons contribute to the dialogue surrounding the potential of DE&I. ‘Tone at the top’ guidance and encouragement welcomes different perspectives as part of decision making and strategy discussions.

“Leaders provide the vision for where a firm is going, so the tone at the top means everything,” asserts Ms Prescott. “People at all levels of an organisation watch their leaders, and their behaviours, to see if their actions align with their words. If leadership says that DE&I is a priority, but their actions and behaviours say otherwise, people will take notice. Leadership must move beyond saying that DE&I is a priority to demonstrating that it is, by consistently putting inclusive leadership into action.”

With DE&I-focused leadership by abdication ineffective, Ms Prescott believes leaders need to: (i) recognise their areas of discomfort and explore what can be learned from them; (ii) recognise that their own beliefs, biases, actions and perspectives affect how they lead; (iii) pursue opportunities to learn and grow and find effective support systems; (iv) play an active role in the work, i.e., letting people see them ‘getting their hands dirty’; (v) use inclusive language; (vi) address and dismantle systemic issues; and (vii) recognise, respect and celebrate the differences that do exist.

“Encouraging a culture that welcomes and promotes diversity, experience and thought is critical to addressing imbalances in the PE industry,” says Gurpreet Manku, deputy director general and director of policy at the BVCA. “Senior leadership can set the tone and establish an organisational framework that promotes a positive culture that fosters DE&I. This could include developing and publicising the DE&I strategy within and outside of the PE firm, allocating time and resources to ensure the strategy’s success, and embedding it within the way the firm operates.

“Additional means of setting the tone and establishing a DE&I framework firmwide include appraisals, leadership training, affinity networks, social activities, discrimination and harassment policies, inclusive office environments, as well as holding senior executives to account. Unconscious bias training is often an important first step, but this must form part of a broader DE&I framework to be effective,” adds Ms Manku.

Time for change

Undoubtedly, the global events seen in 2020 – including the challenges posed by the coronavirus (COVID-19) pandemic, as well as social movements such as Black Lives Matter – have shone a light on the inequalities that exist in society. In turn, these events have helped to sharpen the focus on DE&I in PE.

Also helping DE&I efforts within the PE industry is a recently launched ‘Diversity & Inclusion Roadmap’ – collated by the Institutional Limited Partners Association (ILPA). It provides a suite of initiatives and resources intended to be a clearing house of best practices that reflect the ongoing development and evolution of DE&I.

By releasing this roadmap, the ILPA hopes PE firms will implement and undertake practices that: (i) establish organisational policies, strategies and programmes that assert internally and communicate externally the organisation’s support for advancing DE&I; (ii) support access to a diverse pipeline of talent into an organisation, and the hiring and advancement of diverse candidates within the organisation; (iii) build an organisation-wide culture where it is expected that all individuals are treated with respect and dignity and given equal opportunity to succeed; (iv) promote investment in and success of diverse teams; and (v) allow organisations to track their own progress, and the progress of their partners, against established goals and industry expectations.

“As the minimum expectations for DE&I increase over time, funds that are unprepared and have not implemented processes and systems will get caught out and it could ultimately mean the difference between securing capital from institutional investors or not,” suggests Mr T.E. “In a notoriously competitive industry, PE firms are also facing employee pressure to commit to DE&I.

“People, especially the newer entrants into the workforce, want to work for purpose-driven businesses, that stand for more than just making money,” he continues. “Being able to demonstrate this is key for recruitment, retention and motivation of the industry’s top talent, especially for generations entering the workforce who grew up during the global financial crisis.”

Ultimately, for Ms McQuaid, the pressure on PE firms to promote and increase deep level DE&I in the workplace must and will come from all stakeholders. “Sustainable progress does not come from token efforts and cannot be resolved overnight,” she says. “We must continue to challenge ourselves every day in everything we do, knowing we have a responsibility to build momentum and accelerate toward positive change.”

© Financier Worldwide

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Fraser Tennant