Boosting diversity: what the industry thinks

The industry's lack of inclusiveness is not an issue reserved exclusively for women; rather, it is an issue to be thought about on much wider terms – how can private equity attract and retain more diverse people in terms of gender, age, skill sets and backgrounds?

Adam Turner, managing director of recruitment agent Norman Broadbent, divides private equity firms into three categories: "First are those that have actively embraced diversity; that have set up internal systems and are proactively managing that through recruitment from junior through to senior level."

The second group is those who have been forced to be more diverse by investors: "LPs want to see some level of corporate social responsibility, but are more often demanding teams are more diverse to reflect their own teams." The third group comprises houses with no regard to diversity.

Recruitment fair
It would appear more houses are falling into Turner's first and second groups, but are constrained when it comes to recruiting diverse people: "Private equity is slightly restricted by where it gets its people from," says Gail McManus, managing director of Private Equity Recruitment. "There needs to be more diversity in the feedstock."

Furthermore, as private equity teams are typically small, recruitment is infrequent. This means finding the right "fit" is the main objective when hiring. "They tend to recruit in terms of what they are familiar with, which is often someone like themselves," says McManus. This unconscious bias has led to a small number of houses to request female-only candidate lists in order to force their final selection.

These lists, much like quotas for boards, can often incite outrage. Indeed, people should be hired on merit and not because of positive discrimination. But, while there are so few women in private equity, there is some logic in this approach; something drastic needs to be done in the first instance to move the needle.

Beyond recruiting more women, another less talked about issue facing the industry is its perceived elitism. GPs typically hire from investment banks and accountancy firms, which typically take graduates from top universities, which, in turn, largely take on students from private schools.

There appears to be little attention paid to this. "The bar for entering the industry does not move in terms of background," says McManus. "The bar for entry level includes major qualifications and thinking commercially about deals. Many teams are so small that to take a risk on someone from a different background does not make sense."

However, one firm at least has actively moved away from recruiting out of this limited pool. "We recruit from a wider pool; not just ex-bankers," says Wol Kolade, managing partner of Livingbridge. "We have spent years thinking about recruitment, measuring IQ and EQ, and thinking about 'fit'. I am not letting a handful of academic institutions determine who I hire. MBAs and degrees from Oxbridge do not play a big part in our assessment. We deliberately push for different people." Indeed, the GP has recently hired a teacher, albeit a teacher who was previously a banker.

Livingbridge's approach to recruitment is not only refreshing, but wholly sensible. "The focus of our business is entrepreneurs, who look and feel like everyone in 'normal' life. If we had a team of homogenous males it might be a disadvantage; there would be no one they could relate to," explains Kolade.

Baird Capital managing director Andrew Ferguson agrees: "We have definitely won deals because of our inclusive culture." He recalls a process in 2013 in which five GPs were competing for an asset. All had put forward similar offers, but the management team went with Baird because it was the right fit. "These deals are long-term relationships. Management needs to feel comfortable. Heart and mind is something we work very hard at for winning deals and because it is the right thing to do."

For outsiders, the case for having a more reflective team in order to win deals seems obvious. "I find it absurd there are so few women in private equity when the biggest buyout area is retail and consumer," says Turner. "Some houses have up to 50% of their portfolio in consumer companies. I find it incredible to not have women involved in these deals. Surely it would add tremendous value if private equity had broader, more diverse teams."

LPs are also aware of this. Says Mirja Lehmler-Brown, senior investment manager at Aberdeen Private Equity: "I have examples of funds buying luxury female-led businesses, so we asked them which women were involved in the due diligence. Some firms do, which is good, but some find this question surprising." Lehmler-Brown also points out that healthcare is another sector increasingly popular with private equity, but which is increasingly blurring with the consumer sector and is becoming more female-led.

Pressure from above
Worryingly, on the LP side, Coller Capital's Winter Barometer found that 88% of LPs surveyed believed a higher proportion of women in senior roles would have little direct impact on returns. The report also highlighted that the majority of the respondents were male. However, three in five respondents felt GPs would benefit in a more general sense from having a gender-diverse team.

The findings are consistent with GP reporting experiences: "LPs do not ask us to report on diversity," says Livingbridge's Kolade. "Some investors in the US have embraced this, but it is not a feature of why they back us – they are focused on returns." Kolade goes on to explain that LPs are most interested in the GP's differentiated way of working and how that can be done in a sustainable manner.

This chimes with Baird's approach: "We certainly sell the Baird structure to LPs. We formed the company in this way because we can make better business decisions and generate more value," says Ferguson. "We explain to LPs that different backgrounds can contribute to better decisions. LPs are increasingly focused on how GPs are differentiated and bring value."

Perhaps it is only the forward-thinking LPs that are more concerned about diversity and that, in time, the rest will follow. Aberdeen Asset Management has a diversity focus, and when conducting fund due diligence it pushes GPs on the issue. "Teams need to be about a true partnership and open-mindedness – diversity is part of that," says Lehmler-Brown. The reason for doing this is to ensure the GP team is made up of the best people. If a fund is weighted to just one person, it is likely the rest of the team will simply be "yes people".

"It all comes down to the individuals who are then enabled by the right infrastructure, based on the right values, executed in a flat and inclusive structure," says Lehmler-Brown. "The diverse group of high-quality people will challenge each other and allow for better decisions, resulting in the better performance."

Look out for the second instalment of this feature tomorrow

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