In the current business landscape, characterised by a slowdown in deal volume and a shift towards portfolio protection and optimisation, there is no doubt that the Private Equity (PE) sector needs to embrace inclusion, diversity, and equity (IDE) within the boardrooms and executive committees of both firms and portfolio companies. Over the past year, there has undoubtedly been a significant uptick in the value placed on Environmental, Social, Governance (ESG). However, it appears that the “S” is significantly underrated compared to its more alluring counterparts, “E” and “G”.
Getting the “S” right for firms and portfolio companies will yield results, and the research agrees. Benefits of a more diverse business landscape include:
- Diverse businesses experience a 2.5x higher cash flow per employee.
- Diverse management teams drive a 19% increase in revenue.
- About three in four jobseekers express a preference for diverse companies.
- Diverse teams exhibit an 87% improvement in decision-making abilities.
- Businesses with diversity are 70% more likely to capture new markets, as per research from Harvard Business Review.
While these statistics demonstrate the advantages of diverse teams, the challenge lies in identifying the right candidates.
Many firms have implemented 50% hiring quotas and organisations like GAIN are working to drive a stronger pipeline of young female talent into the industry, and others such as 1000 Black Interns and Social Mobility Insight programs contributing to a diverse talent pipeline. Still, there is a feeling among some that quality may suffer as a result of mandatory IDE quotas. Others may argue that targets and quotas have been in place for many years and the needle has barely moved. This should not be fait accompli. Without quotas in place, very often nothing is done. In the same way we aim for financial targets, we should aim for IDE targets to support our growth objectives.
For hiring and retaining talent, as well as for securing investments, PE should be making bold commitments to IDE.
Creating an inclusive and diverse organisation isn't as simple as filling roles. Organisations must address the challenge of nurturing young and diverse talent. Individuals desire to be heard and valued; organisations must transcend mere checkboxes to understand the significance of numbers for their success and sustainability.
While achieving an immediately diverse boardroom might not be feasible, investment in diverse hiring, mentoring, and development is crucial for future leadership roles. Board-level commitment is essential, not just for setting hiring goals but also for establishing diverse leadership targets. Shifting the narrative and viewing diversity as a value lever is crucial for both firms and portfolio companies.
In an industry driven by EBITDA improvement, there should be no doubt that growth remains unattainable without a dedicated commitment to and tangible manifestation of change.
IDE as a driver for value:
- Viewing IDE as a value driver, one could consider its role in the growing trend of ESG-driven consumer decision-making. Brands aligning with consumer values may attract more customers and foster loyalty through IDE programs.
- At a house level, PE is in competition with other houses and strategies to buy an asset. Firms should think about how a founder might factor IDE into their decision-making when choosing the right investors.
- Especially where LPs are concerned, when the market begins to thaw and deal activity picks up again, might we see lenders and investors who have regulatory-driven targets pass along those requirements and seek to make sure that they yield the results that can be achieved through IDE.
Diverse leadership challenges the status quo, enhances internal talent development and retention, and drives financial results. The most recent FTSE All-Share Women on Boards Leadership Index highlighted that companies that demonstrate leadership in gender diversity are yielding stronger financial results than others, with more than 1.5% higher returns at three and five years.
Mere numerical targets won't alter a culture. However, when quotas are perceived as aspirational targets and ingrained within the firm's overall goals, they can drive change.
It’s a journey and it takes time; this is not a lever that you can pull and see instant results. Even with programs like GAIN educating girls in secondary school about the investment management industry and other initiatives, it will be at least a decade before we can see strong results in just the pipeline and nearly a generation for being able to see those young women achieve leadership roles. This makes today’s commitment even more important. PE should make bold commitments to IDE, not just for women but for all minority interests or miss out.