Header image

More alpha, less male: The gender diversity conundrum

Private equity remains behind the curve when it comes to gender diversity, despite numerous studies concluding a more balanced workforce yields financial dividends. Kenny Wastell explores the progress being made in addressing the issue

Recent months have seen significant milestones reached in the quest to increase gender diversity in private equity. UK-based Vaultier7 became Europe's second female-led GP when it launched in September, while in the same month, law firm Reed Smith launched a networking and philanthropic platform called The 1973 Club to encourage women to join, remain in, or return to, the industry.

The developments come less than a year after not-for-profit group Level 20 – another organisation designed to attract women into the sector and help them succeed – brought on board Jeryl Andrew, formerly a partner at Advent Venture Partners, as its first CEO in order to ramp up activity. In the two years since its foundation, Level 20 has been expanding, reaching 800 members, and recently secured three years' worth of funding from 38 GPs to invest in full-time staff, premises, customer relationship management and mentoring software.

Further encouragement is being provided by a change in gender ratios in France, where a 2016 study by Deloitte and national trade body AFIC found that female representation in the country's private equity segment has risen for six consecutive years, reaching 21% in 2015 compared with 17% when the study began in 2009. The study also found the percentage of investment directors who were female rose from 16% to 22% during the same period.

On a more anecdotal note, both pan-European trade body Invest Europe and its UK equivalent, the British Private Equity and Venture Capital Association (BVCA), are currently chaired by women. Invest Europe named APG's Marta Jankovic as its 2017-2018 chair in June this year, while BVCA named Pantheon partner and Level 20 co-founder Helen Steers as its new chair in December 2016. In some quarters, at least, there are signs the industry is beginning to address its gender imbalance.

There is a self-perpetuating problem that, because most private equity firms are very small with 10, 15 or possibly 20 employees in the office, those making the recruitment decisions are inclined to hire people with backgrounds similar to themselves" – Gail McManus, Private Equity Recruitment

However, as with many segments of the financial services industry, the private equity sector still leaves much to be desired when it comes to the ratio of female to male professionals. According to a 2016 study by Private Equity Recruitment (PER), less than one third of private equity staff are women, with men accounting for 68% of the industry's workforce. More strikingly, at partner or director level, the percentage of female professionals plunges to just 10%, while at senior partner or managing director level it falls further still to 7%.

"It's a very serious issue and people are trying to do something about it," says Livingbridge managing partner Wol Kolade. "We are not merely paying lip service to it. Investors are starting to ask questions, the wider population is starting to ask questions and it is an issue you really need to think about; especially given that we are increasingly interacting with ordinary businesses that are much more gender diverse than we are. That doesn't play very well."

Indeed, despite the aforementioned signs of progress, the rate of change across Europe as a whole remains relatively slow. Recently updated figures from thinktank New Financial and asset manager Columbia Threadneedle Investments reveal women account for just 10% of private equity executive committee members across the continent. Though this figure has improved significantly from the 5% figure recorded in 2014, it still represents the second lowest figure across all European capital market asset classes. Only the hedge fund industry – which has 9% female representation – scores lower in the study.

"PE still has pretty much the lowest gender diversity ratios of any other vertical of the financial services industry," says Sunaina Sinha, managing partner at placement agent Cebile Capital. "While the executive committee ratios may be improving, only 7% of senior personnel in private equity as a whole are women today. That's really quite low, even compared to investment banking and stock broking. So while progress is indeed being made, it's achingly slow."

Improving ratios and financial results
The argument for greater diversity within business is not merely an ethical one. Recent research has concluded that the greater level of gender diversity in a business, the stronger the financial performance. When The Peterson Institute for International Economics and EY recently analysed 22,000 global publicly traded companies, they found those with leadership teams that were at least 30% female added up to six percentage points to their net margins. Additionally, a study by the University of Maryland and Columbia Business School found that S&P Composite 1500 firms with women in top management roles demonstrated increased innovation and were worth $40m more on average than companies with only male leaders.

Pantheon and Level 20's Steers says there is sound economic theory behind the better performance of firms that have more diverse leadership teams, and the argument is reinforced by Cebile's Sinha. "There are huge benefits to having various perspectives at the table rather than just having people who are cut from the same cloth," says Sinha. "Different people from different backgrounds help avoid groupthink. In turn, avoiding groupthink helps mitigate investment risk and brings more diversified returns. In financial theory, you want different assets that are not correlated with each other to come together because the sum of those assets is worth more than each one individually. That's exactly the same principle with human beings."

Furthermore, PER managing director Gail McManus adds that there is a growing recognition that investments across a range of businesses require a diverse team. She says: "When it comes to deal sourcing, there is reasonable concern that you will be most likely to invest in a business that you yourself might use. If your workforce is not diverse, that could mean you are missing out on – or not truly appreciating the value of – other companies that are less familiar to you."

There are many factors that industry insiders point to that can improve – and to a certain extent are improving – the ratio of women in senior positions in private equity. The first, and perhaps most obvious area that needs addressing is recruitment.

It’s a very serious issue and people are trying to do something about it. We are not merely paying lip service to it. Investors are starting to ask questions, the wider population is starting to ask questions and it is an issue you really need to think about" – Wol Kolade, Livingbridge

"Private equity tends to recruit from a very select pool of talent," says McManus. "Firms will typically hire people who have worked at one of the big four doing transaction advisory work, or have come from investment banking, strategy consultancies and due diligence. While those type of recruits might not have a background in private equity, they will have been involved in private equity transactions. That pool of industries also has a predominantly male workforce."

If the industry is relying on other sectors that are themselves grappling with unbalanced gender diversity ratios, it follows that private equity might have to be more imaginative at the recruitment stage if it is to address the issue effectively. "It's about casting the net a little more widely in terms of recruitment and looking for people – regardless of gender – to come into the industry from less traditional sources," says Steers.

Yet despite the best intentions, as various industry insiders told Unquote, some firms view the appointment of people similar to themselves as a form of risk mitigation. The sources argue that in an industry populated predominantly by privately educated white males, this attitude means the promotion of any form of diversity – be that related to gender, race or socio-economic background – becomes even more of a challenge. Says McManus: "There is a self-perpetuating problem that, because most private equity firms are very small with 10, 15 or possibly 20 employees in the office, those making the recruitment decisions are inclined to hire people with backgrounds similar to themselves. That's because they feel there is more likelihood of the person they hire being the correct fit for the team. So the issue is not an easy one to resolve."

Nevertheless, as the figures cited earlier reveal, private equity is beginning to have some success in its efforts to attract women into the industry, although this is predominantly focused on less senior and less investment-focused roles. "The issue is no longer simply a case of how many females there are in private equity, but where those women are," McManus says. "There has been a notable change in attitude across the industry. Many of my clients now demand that they see a 50-50 male to female split of candidates. There have been big strides made at analyst and associate level, where women now account for around 25% of the workforce at GPs, but they virtually disappear beyond those mid-level positions."

Retention and progression
The primary factors that are key to converting those recruits into senior level professionals – as Sinha, Steers, Kolade and McManus all agree – are retention, support and mentoring, which are all intrinsically linked. "There is generally very little movement into private equity at a senior level," says McManus, "so it is important that women are able to move up the tree in the same way as their male counterparts. It takes around 10 years for a private equity professional to reach director level and the industry therefore needs to become good at retaining, promoting and supporting women if it is to address this issue."

One of the situations often cited, in which support is essential to the retention of female talent, is when it comes to an employee starting a family. Says Cebile Capital's Sinha: "Maternity and post-natal periods set women behind the curve from a career continuity perspective compared to their male counterparts. Investment banks and other industries have begun managing that by thinking through the issues and how to provide adequate support. They have considered flexible working arrangements and different paths to partnership, rather than the path measured by hours behind a desk or number of deals completed. That is missing from private equity."

Kolade agrees that the industry – including employers and their female talent – must have a "grown-up conversation" surrounding maternity leave and employees with young families. "As a firm, we are not going to choose our leadership group and senior talent from a small pool of people who do not take time out to have children just because they happen to be men," he says. "That is a crazy approach from a firm's point of view because you are diminishing your potential talent pool. So you need to think about how you retain people and ensure that when you progress them all the way through to senior positions, you are choosing the very best available talent."

Kolade argues GPs need to identify the barriers that hinder the retention of female talent during the years in which they start families and find the best way to support team members in overcoming those barriers. "The first thing is for firms and the wider industry to treat the decision to have children as a positive and desirable event," he says. "And you also have to give people the confidence that there will be no hit to their career trajectory just because of that decision."

When people realise that one GP has a more diverse investment team than another, yet their returns have – at the very least – not suffered, that will make them ask how they too can do the same" – Sunaina Sinha, Cebile Capital

From the employee's point of view, Kolade says they should consider how to manage what can be a six-month handover period before maternity leave and a six-month period directly afterwards in order to get back up to speed. This, he explains, creates a balance that enables a smooth transition into and out of the maternity leave period, which is to the benefit of the firm, as well as employees' professional and family lives. "Both the firm and employees need to recognise there is a change of pace that needs to occur through that process and, if you consider that, it will work for you."

According to Kolade, firms that foster a team environment at all times – where work can be shared, delegated and handed over smoothly whenever required – will be best placed to retain female talent and ultimately improve their gender diversity ratios. "That involves the professionalisation of the industry," he says. "The old gunslinger model of rainmakers going off and doing their own thing is something we are moving away from, and the further we move away from it the easier this process becomes."

Yet beyond the maternity leave period, Cebile's Sinha says there must be a continuing support and mentoring network available to mothers within the industry: "After I had my children I found it extremely difficult to be the managing partner of my business and remain available to them. It is essential that there is somebody who can mentor new mothers and say: 'Here's how you could do it. Here are the options available to you.' Most women who choose to have children are not able to put in relentless 10-12 hour days at the desk, as some of their male counterparts do. Many will need advice on how to thrive in that type of male dominated culture while also being available to their families."

On the mentoring front, the aforementioned Level 20 was launched by a group of senior female professionals in September 2015, with a large part of its remit being to provide exactly this. "When we founded Level 20, we recognised that mentoring is something that is badly needed in the private equity industry," says co-founder Steers. "Individual companies – both on the GP and LP front – are often too small to have an in-house mentoring programme in place". This ties in, she explains, with another of the group's founding pillars: networking and education. "We found people wanted to get together and have occasions to speak about what's going on in the industry and hear about things that could be helpful to them in progressing their careers."

Growing awareness
According to Level 20 CEO Jeryl Andrew, the organisation has already noticed an increased awareness of the need for greater diversity within the sector in the two years since its launch. "We believe there has been a marked increase in the level of awareness of, and interest in, the importance of gender diversity in private equity firms," she says. The organisation is in the process of launching its third mentoring programme alongside a number of other initiatives to improve gender diversity. "It is clear that offering such a programme at an industry level is very valuable as it would be difficult to organise within individual firms, which are often too small for it to be feasible," says Andrew. "For a young woman to have a mentor, often a man, who works within the industry but is not in a related firm and who can give objective and unbiased guidance on a range of career issues can be invaluable. We also hear that the male mentors learn a great deal themselves about the particular issues facing women in the industry."

Slowly but surely, private equity is making inroads in the area of gender diversity. For LPs, the decision to invest in a GP will be influenced to a certain extent by that firm's ethical approach. But to an even larger degree, institutional investors are looking for GPs with diversified risk profiles that provide the strongest returns. The evidence suggests that more balanced teams are the most likely to deliver on that front. Says Sinha: "When people realise that one GP has a more diverse investment team than another, yet their returns have – at the very least – not suffered, that will make them ask how they too can do the same."

To that end, Amsterdam-based, female-led private equity firm Karmijn Kapitaal is proving that diverse leadership teams can yield impressive rewards. In addition to its own leadership, the firm invests exclusively in companies where at least a quarter of the management team is female. Karmijn closed its second fund in June 2016 on €90m after just 10 months on the road, raising almost double the figure committed to its predecessor in less than a third of the time. Vaultier7 will no doubt be looking to emulate that success.

As the industry matures, it is likely GPs that have grasped the benefits of moving away from a male-dominated culture at an early stage will find themselves increasingly popular when out on the fundraising trail.

Kenny Wastell Features Editor Unquote

Kenny Wastell joined Unquote in February 2014 to report on the Southern Europe region, and now has a specific focus on the UK market. Kenny is Unquote's Features Editor, overseeing the in-depth analysis articles published on the platform.

Having grown up in Italy, Kenny eventually returned to the UK and later obtained a degree in journalism from University of the Arts London. Prior to joining Unquote, he had work published by UK newspapers including The Guardian, The Observer and South London Press.

Kenny Wastell Features Editor Unquote

Kenny Wastell joined Unquote in February 2014 to report on the Southern Europe region, and now has a specific focus on the UK market. Kenny is Unquote's Features Editor, overseeing the in-depth analysis articles published on the platform.

Having grown up in Italy, Kenny eventually returned to the UK and later obtained a degree in journalism from University of the Arts London. Prior to joining Unquote, he had work published by UK newspapers including The Guardian, The Observer and South London Press.