Right at the bottom of the recommendation supplied by Portfolio Advisors to the Los Angeles City Employees’ Retirement System on Thoma Bravo’s latest vehicle, below the terms and the fees, the previous funds’ performance and the strategy, there’s a table that makes interesting reading. It lists the ethnic and gender make-up of the manager.
Of the firm’s 12 full-time “officials and managers” listed (including directors, CFO, partners and managing partners), 10 are Caucasian men.
The issue of diversity within the private equity industry is slowly rising up the agenda. Certain GPs and LPs have been vocal about not just the moral and social imperative to be inclusive, but also the benefits that result from diversity of opinion.
The conversation usually focuses on the pressing need to redress the gender imbalance, while less attention has been paid to diversity in ethnicity and educational credentials.
“I think one risk is that all of the guys maybe in the top of the firm come almost from the same background, the same university, exactly the same experiences, and then [approach] the investment decision in exactly the same way,” Anders Stromblad, head of external management at AP2, the second Swedish national pension fund, told the PEI Responsible Investment Forum.
“There are no what I call ‘breaking blocks’, someone saying ‘no, this is not how we do it; we should think in another way’. So diversity on that level, or increased diversity, I think would be very good for long-term investment decisions.”
HarbourVest Partners managing director Kathleen Bacon, a founder member of Level20, an advocacy group which aims to raise the number of women in private equity, agreed: “Diversity, whether it’s by age, by skillset, whatever: it matters. It makes a difference to inputs into decision-making; it makes a difference after decision-making.”
Change in the industry is often forced by LP pressure. There has been very little of that so far, but the status quo has moved on from having some sort of policy to advocating for material change. “They [LPs] are asking the right questions,” says one European GP. “They are raising and pushing for it.”
LPs are not, however, asking for specific reports on firm diversity as part of due diligence. AP6, for example, does not survey its fund managers on the backgrounds of their key staff, but it does ask for gender and ethnicity data on portfolio company directors.
One LP that has taken steps toward diversity tracking is the Netherlands’ APG. It has added questions on GP gender balance to its standard due diligence questionnaire. “From now on every single GP we communicate with is going to get that: we will ask that question,” Marta Jankovic, APG Asset Management head of ESG integration alternatives, told the forum. The LP recently held a conference of its own in New York to broaden discussion of the topic. She added: “I think more institutional investors need to do this.”
So, while LPs inch toward monitoring diversity among their investment managers, smart GPs have an opportunity to get ahead of the game, for their own benefit. After all, “LPs are more diverse than GPs,” the European GP notes. And when it comes to making commitments, “they are all looking for a match.”