Can PE win deals if it doesn’t deal with DEI?

The PE industry is putting some real muscle behind DEI. The Institutional Limited Partners Association has launched its Diversity in Action initiative, with more than 200 organizations signing on. Level 20, a not-for-profit organization that promotes gender diversity in European PE, has more than 80 firms as sponsors. Efforts to measure and make diversity transparent are taking off, with consulting firm Equality Group launching its first Inclusive Top 20 PE and VC Index and planning annual updates showing how firms are doing.

A growing list of individual firms have recently made progress on DEI initiatives, including:

While initiatives are beginning to proliferate, the scope of the challenge remains large. The world of finance is infamous for its challenges with diversity, and the problem is particularly acute in PE and other alternative asset classes.

• In finance broadly, women account for an equal proportion of the workforce in entry-level positions.⁹ In PE, that figure is one-third.⁸
• In finance broadly, 20% of executive committee roles are filled by women, and only 6% of CEOs are female.¹⁰ In PE, women fill 20% of mid-level roles and 10% of senior roles.¹¹
• Similar trends are seen for ethnic minorities. At banks, 12% of employees are Black and 11% are Latino, approximating these groups’ representation in the broader workforce. These figures decline to 4% or less at senior executive levels.¹² In PE, the figures are lower: 3% Black employees across all roles at firms, with that figure declining even more at more senior levels.^{13, 14}
• The numbers aren’t good at portfolio companies, either. A recent study from the Board Diversity Action Alliance asserts that Black and Latino directors each held about 1% of board seats created at companies backed by the top 18 PE and venture capital firms, with women holding 10%.¹⁵

Recent efforts have yet to significantly budge the industry’s numbers — and, therefore, its reputation. Level 20’s latest study with the British Venture Capital Association shows 10% of senior investment roles are held by women, compared with 6% in 2018, for example.¹⁶

It goes without saying that implementing DEI is the right thing to do. An increasing focus on social justice — exemplified by movements like Black Lives Matter — has shined a harsh spotlight on systemic inequalities and prompted action based on an incontrovertible moral case. But there are multiple other reasons to consider DEI as well.

Recruitment

Firms must reconsider and rebuild their hiring practices. Many firms already do this, including by requiring diverse candidates be interviewed for every open position, setting targets, such as hiring 40% female associates in a given year, and expanding interviewing channels to include, for instance, HBCUs.

Recruiting is complicated by the current lack of diversity in the industry, which means that every firm trying to build diversity in its middle and senior levels is competing for the same pool of talent. One way around this is to broaden the qualifications to include diverse candidates from fields other than finance. There is some evidence that this is happening; executives at firms we spoke with said they are increasingly willing to hire at more senior levels from different channels than other PE firms and investment banks — for instance, consultants and insurance companies.

Retention

PE has historically struggled to retain diverse talent, and the sparse data that exists on the topic suggests little improvement has been made in recent years. 

One study that looked at data from 1995 to 2000 found that the attrition rate of women in private markets was nearly double that of men. Sixty-four percent of the women identified in 1995 were no longer in the industry in 2000 vs. 33% of the men.³¹ In a more recent Australia-specific survey in 2020, the Australian Investment Council reported similar results, and additionally found that the highest attrition rates were among junior women.³² In another 2020 survey, Investec found that 21% of women are dissatisfied with their careers in PE, compared with 8% of men.³³

Without solid retention rates, hiring more diverse employees is neither an impactful nor sustainable approach. For instance, a firm that sets a target of having 40% female staff overall and begins hiring 60% female employees per year to “catch up” will never reach its 40% target if it retains female staff at two-thirds of the rate of its male staff. To calculate how long it will take to reach your diversity targets, view the Diversity Integration Model interactive tool created by the Kenan Institute of Private Enterprise, a partner of the Kenan-Flagler Busines School at the University of North Carolina.

PE culture is distinct. On the one hand, it has fostered enormous growth and financial success. On the other hand, it hasn’t sufficiently valued high-performing individuals who may not fit the traditional success prototype that is deeply embedded in PE firm culture and operational processes. Below are 10 characteristics of PE culture that can create de facto barriers to DEI.

Click each characteristic to learn more.

A PE firm’s cultural mores are deeply and unconsciously intertwined and internalized in behavioral norms that, until very recently, have not been scrutinized through a DEI lens. While PE is a relatively young industry, it nonetheless faces the daunting task of excavating its shortcomings and incorporating DEI into a culture that was historically designed to be exclusive.

Before you act, take some time to self-assess. The question set below is designed to help firms explore the experiences their diverse talent is currently having and illuminate the deficiencies that can disproportionately impact diverse talent so they can take intentional, meaningful steps to improve their experiences.

Click each card to see the related question set.