Report: Future of Diversity and Inclusion in Private Equity
[Note: This is a special bonus Working Capital Review post. Tomorrow: A podcast conversation with the roundtable moderator, Dr. Josh Lerner, Harvard Business School & Private Capital Research Institute.]
The Future of Diversity and Inclusion in Private Equity: Can the Industry Meet the Challenge?
A Webinar Hosted by the Private Capital Project at the Harvard Business School and the Private Capital Research Institute. (Full report here)
A group of limited partners and general partners met to discuss and share thoughts on the challenges of diversity and inclusion in the private equity industry. The discussants were Marlon Nichols (Managing General Partner, MaC Venture Capital), Jasmine Richards (Head of Diverse Investing, Cambridge Associates), Kirk Sims (Head of Emerging Manager Program, Teachers Retirement System of Texas), and Willie Woods (President and Managing Director, ICV Partners). Josh Lerner (HBS and PCRI) served as moderator.
Highlights:
Overview: Data show a severe lack of people of color—especially disadvantaged minorities—and women managing private capital investments: the total share of private capital assets under management by diversely-owned firms is less than four percent, with most of it concentrated in a few diversely-managed firms. At the same time, diversely-owned private equity firms face more significant challenges when raising capital, despite investment returns that do not appear to be appreciably different from that of majority-owned groups.
Building the pipeline: The panelists identified several reasons for the “pipeline problem.” Private capital managers predominantly come from the investment banking industry, which itself is not very diverse. Furthermore, hiring decisions are too often made by unseasoned junior associates who are less cognizant of the broader goals of the organization and less experienced in finding talented minorities. As a result, junior associates end up hiring people with backgrounds similar to their own.
Investment criteria: The panelists emphasized the need to consider adopting a new mindset to be successful in underwriting a broad set of diverse managers. For instance, some LPs require a ten-year performance track record as a minimum criteria for prospective fund managers. This approach disproportionately rules out many diverse managers who are newer to the industry. In other cases, overcoming the relationship gaps highlighted above are critical. Of course, the responsibility here does not fall on LPs exclusively. Recent efforts on the part of established venture capital firms to aggressively involve their diversely-owned peers in co-investments can help these groups build up scale and networks.
Role of activism: There have been a number of concerted efforts to encourage endowments to increase their allocation to diverse managers. While all agreed on the desirability of the goals of these efforts, there was debate about the efficacy of the tactics. On the one hand, only when political and social pressures became intense have substantial changes occurred. On the other hand, there was worry that this tactic may backfire. In particular, groups that feel pressured to invest in diversely-owned firms may be inclined to terminate their relationships with these managers once the intense spotlight on these issues has dimmed.
Final thoughts: The extremely modest share of capital in the hands of diversely-owned managers is deeply disturbing, and calls out for action. While the challenge is substantial, there appear to be clear steps that LPs and GPs alike can take to address these disparities.
See the full report here.