The chief investment officers of top institutional investors are more likely to allocate increased capital to private equity firms with more diverse deal teams than those with less diversity.
That was one of the findings of a new report on diversity issues in global private markets released by management consulting firm McKinsey & Co. on Tuesday.
Specifically, the study found, CIOs at institutional investors said they would allocate twice as much capital to the "more gender-diverse" private equity firm when choosing between two firms that are otherwise comparable. Private equity deal teams which are "more ethnically and racially diverse" would receive 2.6 times as much capital, versus a comparable firm.
The study was based on a survey of 42 private equity firms and institutional investors around the world and included interviews with "several industry leaders," a spokesman for McKinsey confirmed by email. The participating private equity firms directly employ more than 60,000 people globally.
"The state of diversity in global private markets: 2022" report also found that although 23% of all investing roles at private equity firms globally were held by women, only 12% of managing directors were women.
Employee diversity at private equity firms varied widely — at the most diverse firms, 32% of managing directors were women and 32% of managing directors were ethnic and racial minorities. At the least diverse firms, there were no women at the managing director level at all, and only 2% of managing directors were ethnic and racial minorities.
Moreover, the study uncovered that even when women and ethnic minorities reached senior investing ranks, they still might not hold the same position of power as their counterparts. For example, women made up only 9% of investment committee members despite comprising about 12% of managing director-level investment staff and 14% of C-suite roles.
The report suggested that institutional investors could become "real catalysts for change on topics like diversity of talent" given the amount of capital institutional investors allocate annually to private equity firms.
Indeed, the report noted that institutional investors are already "increasingly asking for and receiving diversity data from private equity firms seeking to raise funds."
However, the report cited that the consensus among institutional investors that participated in the survey was that the state of diversity in private equity today is "poor."
"(Institutional investors) believe that private equity firms have significant opportunity to improve the representation of underrepresented groups on their investing teams, specifically on the dimensions of gender, ethnicity and race, socioeconomic background, and sexual orientation," the report stated. "(Institutional investors) signaled that private equity firms could do more to diversify their (investment committees) and the management teams at the helm of portfolio companies where they hold majority ownership."
Will Goodwin, head of direct investments at New Zealand Super Fund, commented in the report: "When we look to allocate, we ask private equity funds for statistics on (diversity, equity and inclusion), such as gender pay gap and representation."
The report also noted that globally private equity firms have almost achieved gender parity in entry-level roles. As of the end of 2021, 48% of all entry-level roles in private equity globally were filled by women — although women only held 34% of entry-level investing roles.
Within the U.S. and Canada, whites held 70% of all investing jobs, with white men more than eight times as likely as white women to be managing directors. Asians held 28% of investing roles at the associate level at these firms, but the percentage of Asian investing professionals fell to 12% at the managing director level.
The report also noted that Black and Hispanic professionals had low representation across all levels of private equity investing and that the industry lacks Black and Hispanic role models in the leadership ranks. Blacks accounted for 7% of entry-level investing roles, about double the share of Hispanic professionals. Hispanics and Blacks accounted for 3% and 1% of leaders, respectively, in managing director and C-suite roles at these firms in the U.S. and Canada.
