Private equity’s LPs have power to push the diversity agenda

You don’t often hear of an investor point-blank refusing to engage with a manager on the grounds of a lack of diversity. But that’s exactly what delegates heard from a GP at the Women in Private Equity Forum, held in London in November.

The GP had presented its latest fund offering to a Nordic state pension, which said it would not review the vehicle until the firm could show progress on diversity.

The anecdote is notable because the situation is rare. For all the discussion of diversity and inclusion in the industry – and the need to dramatically increase it – examples of investors citing it as a dealbreaker are few and far between.

Only 14 percent of respondents in PEI’s latest LP Perspectives survey (the full results of which will be revealed in December) had refused an investment opportunity based on a lack of diversity and inclusion at the fund manager level. Only one-third of respondents had actively engaged their managers to promote gender diversity and inclusion.

“Consensus has formed around the idea that the private equity industry would improve with greater diversity”

“I generally feel not enough is being done on this on the LP side,” said the GP on stage. “We really have to make this a hard [criterion]; it’s in the process, but not at the forefront of the process.”

PE’s women problem

Women made up less than 10 percent of all senior positions at private equity firms globally as of October 2017, according to a report from executive search firm MBS Intelligence. Including mid-level executives, analysts and associates, women still only account for 17.9 percent of all employees in private equity firms.

Manager diversity is often addressed at some point during the due diligence process. The Institutional Limited Partners Association has produced guidance on what to ask GPs, but the findings tend to have only a limited bearing on the decision to make a commitment.

Gillian de Candole, an investment principal at Brunel Pension Partnership, said at the conference that it considers diversity when grading managers on sustainability. A lack of diversity can contribute to a lower overall score but wouldn’t stop a commitment by itself.

Consensus has formed around the idea that the private equity industry would improve with greater diversity. Inclusive workplaces would attract a broader base of talented recruits and allow for a wider set of viewpoints when investment decisions were being made.

Change will feel glacial. But without investor pressure, it will be even slower. The more investors who say, “Come back when you can show how you are fixing this”, the faster progress will be.

Carmela Mendoza is a senior reporter at sister publication Private Equity International