Three key takeaways: LPs are prepared to walk away over DE&I

1 Definitions of diversity are widening

How do you create a more diverse working environment? Gender has been the obvious starting point for investment firms taking their first tentative steps into the world of diversity, equity and inclusion, but ethnicity has proved a tougher ask.

Black investment team representation, in particular, remains weak. Firms have, however, responded with enthusiasm to the 10,000 Black Interns initiative and the Alternative Investment Programme spearheaded by Sponsors for Educational Opportunity. Industry associations are also expanding their focus with dedicated initiatives.

Yet private funds are now being confronted with the idea that diversity actually encompasses a far more multi-faceted and complex set of differences than they might ever have imagined.

These forms of diversity include sexual orientation, gender identity, disability, neurodiversity, socio-economic or educational background and myriad other traits that are hard to define.

There is no denying the scale of the challenge, but investment firms are starting to appreciate that a cultural shift to diversity of thought and experience can truly transform an organization.

Monitoring progress is crucial, says Anne Philpott, principal on the private equity and junior capital solutions team at Churchill.

“It is important to take your tracking to the next level,” she says. “You need to look at how many minorities have been promoted; how many women are in management positions or earning carry; how many diverse team members have ownership stakes in the business.”

2 The performance debate is – almost – over

Philosophical debates over the impact of DE&I on performance have now – largely – been confined to history. And in a performance-driven culture like private markets, that is critical. The data paints a clear picture. GPs and LPs are well versed in statistics that reveal that racially and gender diverse publicly quoted companies dramatically outperform their non-diverse peers.

Meanwhile, an understanding of why diversity contributes to performance enhancement is growing up alongside these headline numbers. Cloud-based decision-making software company Cloverpop has found that diverse and inclusive teams come to better business decisions up to 87 percent of the time.

There is a growing acknowledgment that an investment team that brings a breadth of knowledge and experience to the table is going to spot more risk and more opportunity. Although correlating diversity to investment performance is complex, due to the multiple factors at play, hard evidence is starting to emerge in the investment sphere.

The National Association of Investment Companies has found that diverse private equity funds outperformed the Burgiss Median Quartile in almost 80 percent of vintage years studied. Research by Rock Creek Group found that gender-balanced teams produce
20 percent higher net IRRs.

It seems increasingly likely that DE&I will play a vital role in a firm’s ability to generate returns for its investors. And the performance gulf between diverse and non-diverse asset managers is only going to widen. Although only a small number of LPs will currently walk away from a fund based on a lack of diversity, that is changing. Investor commitments, as well as the ability to seal deals and exit at optimum valuations, will be facilitated when a firm can demonstrate its commitment to DE&I.

“As an organization, questions around D&I have been part of our diligence process for as long as I can remember,” says Raphaelle Koetschet, head of Caisse des Dépôts’ funds investment team. “But this is clearly an issue that has remained overlooked by the industry as a whole until recently. The reactions of GPs to our questions have certainly changed and we’re thrilled to see that D&I is now at the frontline of conversations.”

3 Inclusion is the new priority

Whenever a new concept emerges in the world of investment, there is a period of interrogation and learning that is often accompanied by a battle over linguistics. D&I quickly became a go-to acronym. But as understanding around the role and value of diversity in private markets increases, many firms are re-thinking their terminology.

A whole raft of firms, including Apax Partners and KKR, have made the conscious decision to flip the term D&I on its head. There is a growing recognition that diversity can exist without inclusion. However, it is only by ensuring that diverse team members are valued and listened to that diversity can help to deliver improved performance. “We believe that a diverse team, with different thinking styles and visions, will bring deeper discussions and more innovative ideas and solutions,” says Coralie De Maesschalck, head of ESG and CSR at private debt business Kartesia.

The addition of equity to create DE&I has become commonplace too, as firms acknowledge that equal opportunity – from recruitment to promotion and pay – is integral too.

Firms are increasingly putting their convictions into action with well-defined steps to cultivate a greater sense of inclusivity. Measures include an overhaul of benefits to ensure they are gender-neutral, formal anti-discrimination policies and the launch of employee resource groups to support specific communities. Firms are also getting creative, with social events, open dialogue schemes such as Nuveen’s Courageous Conversations and even DE&I book clubs to foster the sense of openness and inclusion that is critical to ensuring diverse talent reaches its full potential – and sticks with your firm.