Private markets asset classes are fundamentally performance-driven environments, which is why evaluating, articulating and then fully embracing the link between DE&I and performance is so important.
Evidence of a positive correlation in the wider corporate landscape has been plentiful. “Studies from HBR and McKinsey and others show outperformance by diverse organisations,” says Anne Philpott, a principal on the private equity team at Churchill Asset Management. “You need a wide range of different voices and perspectives, and they all need to be at the table, engaged and listened to, otherwise both risks and opportunities can be missed, and brand- and culture-building impeded.”
A 2015 McKinsey study, for example, found that companies in the top quartile for racial and ethnic diversity were 35 percent more likely to have financial returns above their respective industry medians, while companies in the top quartile for gender diversity were 15 percent more likely to be outperforming their industry average.
The link between diversity and performance among investment firms is trickier to unravel. Nevertheless, in 2019 the National Association of Investment Companies found that diverse private equity funds outperformed the Burgiss Median Quartile in almost 80 percent of the vintage years studied. Research by Rock Creek Group also found that gender-balanced teams produce 20 percent higher net IRRs.
“I believe we need to look at diversity not just as a ‘nice to have’ but as a crucial element of value creation,” says Pawel Gierynski, managing partner at Central and Eastern European firm Abris. “Cognitive bias is a huge issue in private equity and one that can’t be solved by the middle-aged white men who dominate the industry.”
Accepting that increased diversity and inclusion will boost performance is the first step. Understanding why that is, meanwhile, will help create a self-fulfilling prophesy.
Greater diversity improves decision making. Research by Cloverpop, a company that develops cloud-based decision-making software based on behavioural science, concluded that companies with diverse and inclusive teams come to better business decisions up to 87 percent of the time.
“We believe that a diverse team, with different thinking styles and visions, will bring deeper discussions and more innovative ideas and solutions,” says Coralie De Maesschalck, head of ESG and CSR at European private debt business Kartesia.
“We believe diversity of thought is a key factor in our decision making and that it will have a positive influence on long-term financial performance,” adds Lauren Harris of Northleaf. “The encouragement of and hearing and acting upon diverse perspectives is a key element of our success.”
DE&I is a powerful tool when it comes to attracting and retaining the best people – which, in the context of investment management, is clearly critical to driving performance. “Being diverse and inclusive allows us to retain our current employees and to attract great new talent, as diversity and inclusion are important topics for millennials and generation Z,” says De Maesschalck.
Meanwhile, it is increasingly clear that a failure to embrace DE&I could have catastrophic implications for performance, as not only employees, but investors and target companies, move to boycott laggards. “Many investors now won’t give you their money unless you not only tick the box, but walk the talk,” says Livingbridge’s Wol Kolade.