DIVERSITY IN PRIVATE EQUITY
Private equity is ownership in a corporation that is not publicly-traded, or, more simply stated, the investment in privately owned companies. Over the years, private equity has proven itself a successful investment strategy and continues to vastly increase its footprint. The magnitude of its influence is demonstrated through its reach. For example, private equity-owned companies account for about 5% of America’s GDP, and employ 6% of American workers, or approximately 9 million people. Given this reach, it is fair to say private equity has a significant impact on American life.
The reach of private equity provides many benefits, economies of scale, network effects, and both depth and breadth of data to analyze. As a result, industry is inheriting more responsibility than ever. The responsibility to do right by the millions of American private equity companies directly and indirectly influences the business industry and economy. Among other factors, this constitutes the firms’ responsibility to eliminate the gender gap and lack of diversity both in the investment firms themselves and the companies they invest in. Since private equity companies have directly influenced the lives of so many Americans, who represent all races, ethnicities, and genders, it is problematic to have teams that do not reflect the fabric of the diverse population of America making decisions. If undiverse investment teams make decisions, they will not fully understand the impact of their choices on the diverse American population.
Diverse investment teams are right in a social sense and also in a matter of financial logic. In research conducted by Oliver Gottschlag in partnership with MVISION, across 2,454 deals, 51 fund managers, and 220 funds over 20 years, deal teams including women generated 7% more alpha, a 12% higher IRR, and 0.52x more total value to paid-in multiple. Gender diverse investment teams also realized 10% to 20% higher returns and have a failed deal rate that is 8% lower than entirely male teams. Limited partners of private equity firms should demand more diverse investment teams.
Due to logical deduction and evidence of both social and economic implications, there is absolutely no reason why the percentage of women in private equity is 19.4% and has increased minimally since 2017. In the 19.4% of women in private equity, 50% are in either marketing or investor relations, while another 37% are in accounting or financial roles; only 14% of women in the industry are investors. That means that of the already minority 19.4% of women in private equity, only 2.7% have a seat at the investment table. Kara Helander, chief of diversity at Carlyle, articulates the reasons for the gender gap and lack of diversity in private equity well. She notes that private equity is a relatively young industry that functions as an apprenticeship business. This means that the “originators” of private equity used favoritism to build their companies, which is when bosses recruit those within their close circles even if they’re less qualified than other candidates. This is unfair because people that are more qualified but not in the boss's inner circle will be cheated out of a promotion they deserve. To stop the gender and diversity gaps in private equity, firms should stop using favoritism in their hiring process. Instead, private equity firms must start hiring more diverse teams to represent all Americans and create more successful, well-rounded firms.