March 4, 2021 –
Diversity is a major topic of conversation in the private equity community, and many leaders think it is a long over-due, wakeup call to action. There simply are too few women and people of color serving in lead investment roles across the industry. A study by the data analysis firm Preqin, for example, found that only 17.9 percent of private equity employees worldwide are women, the lowest figure of any asset class. A variety of other studies, including separate ones by Deloitte and Stanford University, point to low racial and ethnic diversity in the private investment universe.
At the same time, research in recent years has highlighted the positive impact diversity can have on investment outcomes. A study by Rock Creek Group found that gender-balanced teams have a 20 percent higher net internal rate of return. “That’s one major reason that nearly every private equity client engaging us today is seeking assistance in the pursuit of a more diverse talent pool,” said Sarah Burley Reid of Spencer Stuart in a new report. “Given these market realities, we thought it would be helpful to hear from a range of leading figures at several of the large, limited partners (LPs) in private equity to gather their thoughts on the value of diversity from their points of view, the industry’s hiring practices and how they impact diversity, and how these leaders believe general partners (GPs) could be operating differently to integrate a greater diversity of views into their investment process,” she said.
Spencer Stuart’s survey interviews included: Dan Feder, managing director of investments, University of Michigan; Caroline Greer, managing director and chair of the diversity & inclusion office, Commonfund; Rich Hall, deputy chief investment officer, University of Texas/Texas A&M Investment Management Company; Eric Lang, senior managing director of external private markets, Teacher Retirement System of Texas; Michael Langdon, senior investment officer, Oregon State Treasury; Kim Lew, VP and chief investment officer, Carnegie Corporation of New York; and Kristin Mugford, senior lecturer at Harvard Business School.
Investors are Paying Attention
Almost all of the LPs that Spencer Stuart interviewed said that they pay attention to a GP’s level of diversity (or lack thereof). “While generating the best returns is obviously the primary goal, they said, diversity is a clear sign of a firm’s culture and its ability to have differentiated perspectives on how to support and create value in the portfolio,” said Ms. Burley Reid.
The Emerging Talent Population Can Support this Evolution
Beneath the lack of racial and ethnic diversity is a similar lack of diversity in backgrounds — most have experience with the same Wall Street institutions followed by degrees from the same top-tier MBA programs. However, as one LP put it, “the talent pool is there to be recruited.” Though diversity on private equity investment teams remains low, the population of business school graduates is becoming more diverse.
Achieving More Diversity: What Firms Can Do
Based on Spencer Stuart’s experience working with firms to find and develop diverse talent, the firm identified several approaches private equity firms can take to increase diversity:
• Connect with the talent pool.
• Support the pipeline.
• Consider targeted senior-level hires.
• Exercise creativity and openness in hiring.
• Remember that retention is as important as recruitment.
Building an inclusive culture, creating strong people development, and embracing workplace flexibility are central ingredients to success. Spencer Stuart said to make sure your diversity hires know they work for people invested in keeping them and helping them thrive. “The diversity discussion carries on as institutional investors continue to seek out investment managers who will achieve the best results,” Ms. Burley Reid said. “This is a topic that private equity firms can’t afford to ignore, as they think
about enhancing returns and satisfying the interests of the LP community.”