Is PE becoming more diverse?

Fresh research shows that the private equity industry is still mostly an all-white male’s club. It may fall on LPs to shake things up a bit.

Women and minority groups remain underrepresented in private equity. Accounting firm Rothstein Kass recently polled 215 private equity firms (the large majority of which were US-based) to discover that less than half of respondents have a female or minority managing partner that has influence or control over the investment decision making process.

The financial services industry, and private equity in particular, has historically suffered from a lack of diversity – but it can seem particularly surprising as demographics shift. In places likes the US, minorities make up an increasingly larger proportion of the population. Polls of MBA programs also reflect increasing numbers of women and minority graduates. In 2012 women accounted for 39 percent of the applicant pool for full-time two-year MBA programs, up from 35 percent in 2011, according to the Graduate Management Admission Council, an intelligence provider. 

However it seems GPs are giving diversity in hiring more thought then they had in the past, according to market sources. That’s welcome news, but leads to the question why now? Part of the answer may be investor demands.

[LPs] have women, minorities; they want to make sure there is a fair allocation of their capital to people who represent their interests

“If you look at the composition of the public pension plans, the majority of the people making the decisions with GPs is diverse,” says Pantheon principal Yokasta Segura-Baez. “They have women, minorities; they want to make sure there is a fair allocation of their capital to people who represent their interests.”

LPs, it seems, want to see their own growing diversity reflected in their GPs. “Take for example public teachers’ pension plans [in the US], most public teachers are not white middle aged men,” says Meredith Jones, director at Rothstein Kass.


Many firms say that their hiring practices simply come down to finding the best person for the job, and factors like race and gender are irrelevant. 

But missing from this line of thought is how the diversity of a fund’s team can impact performance, some in the industry argue. Selecting candidates without weighing what unique experiences and perspectives they may bring to a group could be a mistake, the thinking goes.   

To see if diversity has a measurable impact on performance the National Association of Investment Companies, which represents diverse and minority-owned private equity firms that focus on the US, conducted a study to find that firms with greater diversity among their staff have outperformed their rivals. NAIC member firms include Clearlake Capital Partners and Palladium Equity Partners, to name but two examples. 

Using KPMG-compiled data, based off Thomson Reuters performance numbers for benchmarking, the NAIC discovered that its member firms’ median net IRR during the time period from 1998 to 2011 came in at 15.2 percent, compared to 3.7 percent for all US private equity, and 7.1 percent for US buyout funds. Clearly there is evidence that diversity is a winner with respect to portfolio performance. 

But if GPs can benefit from greater diversity, both in performance and keeping a segment of LPs happy, why aren’t more firms taking notice?

The answer has some historical aspects to it, according to Jones. Many investment professionals are given senior positions when poached by rival firms, or create their own leadership position by going it alone in a spin-out fund. However, in a chicken and egg type conundrum, women and minorities have not been afforded these opportunities to rise because of their historical lack of presence in the industry. “This builds on itself over time,” she adds.

Some firms have taken deliberate action to break the cycle. In May for example private equity fund of funds manager Pantheon began a minority hiring initiative. To aid its efforts the firm teamed up with Sponsors for Educational Opportunity (SEO), a non-profit organization that provides education, exposure, training and mentoring opportunities to minorities. 

As part of the initiative Pantheon will offer summer internships in its New York office to participants of SEO’s programs. The firm will also be involved in SEO events, including educational workshops, to help encourage more minority college undergraduates to become interested in careers in private equity. And Pantheon isn’t the only private equity firm to see the benefit in a SEO partnership, CCMP Capital and Grosvenor Capital Management also accept interns from SEO’s programs. 

But for private equity to truly be considered diverse it must also hire more women and minorities in senior positions. Of course many private equity firms have accomplished this – including for example European buyout firm Mid Europa Partners which just last October promoted Michelle Capiod to partner, the first woman to take up a senior position within the firm – but on the whole the industry is moving too slowly, argues Segura-Baez. “[Diversity hiring] is not only the right thing to do, it is also what clients want. So if you are not able to adapt you are going to start finding it difficult to do business,” she warns.  

Sources who support her viewpoint say that diversifying is about remaining relevant in a changing marketplace. As investors’ preferences change, meeting their demands is integral in maintaining good relations, she adds.

That is not to say that firms who don’t instantly start hiring more women and minorities will stop receiving allocations though, concede diversity proponents. Andrea Kalliaras, audit principal at Rothstein Kass agrees, saying that “if the past is any indication, the process is likely to be one of evolution, not revolution”.