The State of Diversity in the US Private Equity Market

Private Equity is the capital investments made in private companies which are not listed in any public stock exchange. An investor buys a stake in a private company with the hope of value enhancement of its stock.

Why is Diversity important in the Private Equity Market?

Major PE market players have been redefining their recruiting, hiring, and promotion processes, to eliminate and mitigate gender biases in their workplaces.

There is a great need for transparency in the processes, desired skills, capabilities, and results. More can be achieved by having clear goals and what results are expected from a particular role and defining the clear required skills and capabilities. A research study published by Deloitte reveals that the teams which are high performing are both cognitively and demographically diverse.

Albert Einstein rightly said, "Our significant problem cannot be solved at the same level of thinking which was there when we created them." With divergent backgrounds and Diversity, we get a diverse level of thinking which helps to look at problems and challenges with a new varied, expanded horizon of thinking and produce innovative results.

Gender disparity still prevails despite progress in inclusivity, and the white workforce still dominates US Private Equity players. It was around two years when George Floyd was killed, and racism made to a massive revolt movement which led many institutions (both public & private) to revise and focus on reforms for Diversity, Equity, and Inclusion (DE&I) in their corporate manifestos.

Katie Moore is a managing director of fund investments at Hamilton Lane, a private equity investment management firm. She also confirmed that private markets lag far behind their public firm peers and corporate America as there was less prominence on DEI before the pandemic.

Ethnic Diversity

PE organizations need to disclose the representation percentage from ethnic minorities. We can only achieve equality for the oppressed and downtrodden communities by bringing changes in legislative and public policies.

However, US Private Equity organizations have increased their percentage of ethnically diverse talent and women employees, surpassing corporate America at their junior levels. At senior levels, it remains a challenge for Diversity, Equality, and Inclusion (DE&I).

Data and Statistics on Diversity

McKinsey conducted a poll in October 2021 on 'The women in Private Equity Global Forum.' They surveyed 423 companies and revealed that 54% of women investors said, "Our promotion is delayed due to gender bias." The survey covered responses from over 65000 employees from 88 corporations. The data about US Private Equity firms come from about 30000 employees across 18 mid-sized & large US Private Equity firms.

20% of MDs of PE firms comprise women of color (WOC). PE firms  surpass corporate America at the entry-level, but at the POC level (MD level or equivalent roles), one in a fifth only were held by women. Only 12% of C-suite positions were held by women of color when we talk about PE firms, while the overall percentage is around 18%.

As per the Mckinsey report in 2020, 44% of senior associate-level roles were women, while at the MD level, they were just 20%. Sandra Horbach, cohead and MD of US buyout and growth at Carlyle, a renowned leader in the PE industry, shared a few tips for women in investing for succeeding in PE.

Sandra said we must be quick to switch firms if our career is stuck. There are numerous firms, and we must be courageous to make our own decisions. We must always be courageous to initiate in challenging situations, as in every challenge lies tremendous opportunities. We must advocate our self-interest and must never draw back from the challenges.

PE firms will take time to curate a more equitable culture even though there has been much progress in the past two years. PE firms, those aspiring to improve gender parity, must audit their external hiring process, retention policies, and promotional activities.

A survey made in the US on caste by Equality Labs in 2018, covering 1,500 people, shows that 52% of Dalits and 25% of Shudras feared their caste being disclosed. It also showcased that 60 percent of Dalits encounter caste-based discrimination at workplaces, and 2 out of 3 were reported to be treated with unjust discrimination.

At the tech giant Google, a scheduled talk from one of the US-based Dalit activist Thenmozhi Soundararajan, a globally recognized anti-caste campaigner, got canceled due to employee pressure and remained in the media for a long. After pressure from its employees claiming their lives to be at risk, Google had to cancel the talk, and the employee inviting Thenmozhi had to quit due to warnings and risk for her life.

The talk was supposed to be part of the company's Diversity Equity Inclusivity (DEI) program for employee sensitization, which Google could not handle.

Kerryann Benjamin, chief diversity officer and talent development head of one of the largest alternative investment management firms, KKR, said that they hired 50% of women in the new hires of the past year. He added that his firm's overall number of women increased this year. The firm has planted the seeds of DE&I as a strategic priority move, and it will fruit in the coming future.

Gender equality is highly asymmetrical when we talk about promotions in the workplace. When we collected the data during the past two years, men in PE firms were promoted at higher rates than women across all levels.

Sarah Maynard, global head of DEI at CFA Institute, also reiterated that the PE firms are attracting a more divergent workforce at the entry-level. Still, the challenge lies in ensuring they stick to such roles when promoted to higher levels.

Measures PE Firms can undertake.

PE firms can promote Equity and Diversity by being aware of unconscious bias. Implementing pay equity is another way to foster Equity. Making the employees aware by educating and providing appropriate training and acknowledging holidays of all cultures can make the teams more inclusive.

A good team mix of all cultures can bring varied ways of performing tasks and divergent creative thinking to find innovative solutions for organizational problems and infuse creativity. PE firms can incorporate more inclusive workplace policies and mentorship programs to guide their employees for better engagement. Creating employee-let task forces and delegating responsibilities can also help create an inclusive culture.

A culture shift at each level within the PE market, be it investing or non-investing firms, can rectify the hiring, retention, and promotion processes. A system should be in place only when we decide on the desired outcome and work for it reversely. Decisions are what make goals clear, and sticking to them brings achievement. Horbach's advice deems fit here when she adds, "We can have the best policies in the world, but at the same time, we need a culture that can support a diverse workforce."

Conclusion

Private Equity must focus on debiasing the promotion process from gender inequality at all levels and create an environment of Diversity, Equity, and Inclusion (DE&I) where ethnic diversity flourishes and creates a bias-free economy.

PE firms must focus on retaining and promoting a diverse talent pool without any gender biases that can enhance productivity to create a healthy environment. A divergent talent pool can excel with fewer mental health issues.

Diversity brings broader relationships, perspectives, and experiences that can go far beyond closing deals and generating leads. By defining clear roles, and core capabilities among the hierarchical investing levels, PE firms can build a great future workforce that will further lead to organizational growth following the principles of DE&I with an inclusive culture where each individual feels they belong.

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