How private equity firms can optimise their approach to DEI

Diversity, Equity, and Inclusion (DE&I or DEI) considerations reveal a company's efforts to ensure they cultivate a positive working environment. This working environment must be welcoming to individuals with less-privileged identities. DEI-conscious companies advocate equality in terms of gender, ethnicity, culture, class, sexuality and, more. Crucially, these companies understand the value of embracing our differences.

In today's day and age, many firms openly discuss the importance of DE&I. However, many leaders in private equity (PE) still fall short when it comes to transforming their intentions into action.

What is DE&I?

The Independent Sector defines diversity, equity, and inclusion based on language used in the D5 Coalition, the Racial Equity Tools Glossary, and UC Berkeley.

What is Diversity?

“Diversity includes all the ways in which people differ, encompassing the different characteristics that make one individual or group different from another.” independentsector.org

'Diversity' is most frequently used in discussions pertaining to gender, culture, race, and ethnicity. However, organisations adopting a more proactive approach to DEI often broaden their definition of diversity to include a person's age, place of origin, religion, sexual orientation, any disabilities they may have (visible or invisible), their socioeconomic status, etc.

What is Equity?

“Equity is the fair treatment, access, opportunity, and advancement for all people, while at the same time striving to identify and eliminate barriers that have prevented the full participation of some groups.” independentsector.org

To foster equity within a business, a firm should ensure its protocols are fair.

This 'fairness' should be evident across all levels of the organisation, from the allocation of tasks and resources, to the implementation of rules. All employees should be held to the same standards.

What is Inclusion?

“Inclusion is the act of creating environments in which any individual or group can be and feel welcomed, respected, supported, and valued to fully participate.” independentsector.org

A 'welcoming environment' doesn't just mean saying good morning to your colleagues. It means cultivating an environment in which everyone feels comfortable being themselves. This environment fosters not only individuality at a social level, but also ensures employees feel comfortable speaking out to communicate new ideas.

DEI, ESG, and Private Equity

DEI bridges the 'S' and 'G' sectors of Environmental, Social, and Governance (ESG) metrics. However, the Institutional Allocators for Diversity Equity and Inclusion (IADEI) has also found that DEI is especially important for private equity firms in particular. This is because DEI improves performance and reduces portfolio risks.

Forbes recently collated research on DEI and investment performance. The findings were as follows:

Diversity leads to better approaches to risk

A more diverse team is more adept at risk assessment and will implement safer financial policies. A 2019 study by Grompers et al. discovered a 10% increase in diversity in the venture capital industry from 1990 to 2018. This increase directly correlated with a ~1.5% increase in returns.

Gender diverse teams make better investment decisions

According to a 2019 study by Gottschlag, investment teams with female representation achieve 12% greater returns on average. They also reach and 0.52x higher total value paid than teams without women.

These results have been backed up by an array of independent studies. A study by the International Finance Corporation (IFC) revealed that venture capital-backed firms entering emerging markets benefit from a 1.6 times increase in their step-up valuation. This is because their teams are more balanced in terms of gender representation.

Strategies to drive DE&I

Increasing representation through recruitment

In recent years, private equity firms have made some much-needed progress with regard to gender diversity. In 2020, 54% of junior positions in PE firms in the US were held by women. This was a 9% increase on 2019's figures. However, gender disparities are more apparent with regard to more senior roles, and female representation drops to 20% at the managing director level.

The first step in addressing this issue is to make a clear commitment to diversity and set quantifiable targets. These targets could involve setting a timeline for reaching a certain percentage of women in a governing body. Women could also be shortlisted for all open positions that need filling.

Organisations should look beyond current members of governing bodies, so that candidates that are currently in C-suit positions are considered as well. An active pipeline can help improve the consistent hiring of women in governing bodies, ensuring one person’s employment is not just a one off.

The exact same strategy can be used to ensure any under-represented groups are become more fairly represented within the firm:

1. Make a visible commitment to diversity

Outline your commitment to increasing representation in your governing body. Make the commitment quantifiable by setting a target and making it public.

2. Always shortlist under-represented groups

Ensure that a candidate from an under-represented group is always shortlisted when you are looking for a new governance member. Make this clear to any recruitment companies you work with.

3. Look beyond current members in governance positions

When recruiting, look beyond current C-suite members and expand your search criteria. Often, recruiters will pick from a pool of C-suite candidates as standard practice, so ensure that they expand their criteria. Do not solely consider candidates with prior board experience. Instead, consider candidates with the right level of expertise, as set out in the search criteria.

4. Maintain an active pipeline

Include more people from under-represented groups in your network and explicitly ask recruitment firms to include these candidates. Ensure that this is not a one off, but rather a change in mind-set. When a prospective candidate has been identified, it is important to cultivate long-term relationships.

Improving equity and inclusivity through commitments

As with diversity, making a public commitment to improving equity and inclusivity is extremely important. However, these commitments should be reflected in the firm's policies and through its actions.

A firm should hold itself accountable at all times. Regardless of how inclusive it might seem, managers should always be looking for ways in which equity and inclusivity could be improved. A continuous review process can help with this and can also enable firms to track progress over time.

Employees should also be encouraged to report any unethical behaviour through staff surveys, internal reporting systems, and external hotlines. The firm's Code of Conduct should clearly outline what is considered acceptable and unacceptable behaviour.

How KEY ESG helps private equity managers

ESG and DEI go hand in hand. DEI metrics can be effectively measured by KEY ESG's software. General partners can track data for their specific firms, but also compare data from across their entire portfolio.

Having a tracking system in place enables private equity managers to hold themselves accountable. They can also identify areas for improvement and show themselves to be proactive with regard to DEI.

Get in touch with a member of our team if you're interested in learning more about how KEY ESG can assist with DEI. Alternatively, book a free demo to see for yourself!

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