Private Equity Industry Struggling to Attain Gender Diversity
By David Thompson
Jul 21, 2022 11:49 AM EDT
Jul 21, 2022 11:49 AM EDT
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Despite significant progress being made to counter gender imbalance, women are still largely underrepresented among the investment decision-makers and in leadership positions at private equity (PE) and venture capital firms. The industry has gained a notorious reputation for being entirely male-dominated, which has significantly impacted the consumer perception of the industry and has led to difficult challenges in hiring processes.
Dubai Investment Fund (DIF) Research has identified significant gaps in gender diversity across leading firms in the United States.
DIF is a leading middle-eastern investment fund with a history of supporting investment initiatives led by women and minorities. The firm's insights have supported significant development in the PE sector.
The study points towards the importance for private fund management companies to strive for a better gender balance in this sector by placing more females in decision-making roles in order to provide equal opportunities to all and benefit from inclusivity and the overall growth of the organization.
The private fund management sector has proven to be a strong source of financing over the years, with more than $3 trillion in assets under management, of which nearly $800 billion is allocated to emerging markets. These firms provide entrepreneurs access to funding in conditions where public equity markets and debt are not viable options for capital. However, despite the industry's global impact, female inclusion in the sector has not made any significant headway.
The collaborative research by Oliver Wyman, the International Finance Corporation (IFC), and the investment firm RockCreek examined gender balance in private equity and venture capital firms and the companies they invest in within the emerging markets. Gender balance can be defined as leadership teams with at least 30% of men and women. The study found that women only account for 10% of all senior positions in PE and venture capital firms around the world that receive this investment capital, while women-led organizations collected less than 3% of global venture capital in recent years. The study analyzed more than 8000 firms and its finding suggest that gender balance has a significant impact on financial performance. PE firms where women account for at least 30% of the investment decision-making team reported 10%-20% higher rates of return, as compared to those where women are not well represented. The findings also suggest that when women are not adequately represented in the PE industry, women entrepreneurs face much more challenges in accessing capital. The report states that female investment partners invest in almost twice as many female-led businesses as compared to male investment partners. In addition, companies with gender-diverse leadership saw valuation increases at the portfolio level that were 20 to 30% higher than those with unequal representation.
On the other hand, according to a study by Preqin, women make up 53 percent of the workforce in the investor relations team and 39 percent in the finance team, respectively. At senior ranks, however, the percentages drop to 34% of investors. The study also found that only 17.9% of employees in PE firms worldwide are women. This figure is the lowest of any asset and remains unchanged from 2017. In addition, only 5.2% of board seats in PE firms are held by women. This is also reported by the European Union Equality Index Ranking, which states that women make up only 20% of boards at companies owned by Private Equity firms. The Preqin report also highlights the numbers across different regions, where women make up broadly equal proportions of private equity employees. This ranges from 19% in Europe to 17% in areas beyond North America, Europe, and Asia. Of all regions, Asia is reported to be the only region where more than one in ten senior employees are women. In addition to this, Preqin's study also finds that among the largest PE firms, women account for the largest proportion of senior employees in China (14.0%) and Hong Kong (13.8%), while accounting for 3.7% of senior employees at PE firms in South Korea.
In the male-dominated sector of PE, the gender gap starts with the number of women hired for entry-level roles, which then grows as women advance in their careers. The primary reasons that cause this gender gap at each stage of the process include:
The PE industry has developed a notorious reputation for being male-dominated and biased towards women. This image deters women from applying in the first place. The fact that there are a limited number of women who have acquired senior or even mid-level positions reaffirms this perception and portrays an image to potential female applicants that they will not have fair opportunities to advance in their careers in this sector, and hence it is better to direct their efforts elsewhere.
A number of studies have suggested that there is a subconscious bias against women in technical roles that might be triggered during the hiring stage. In addition to this, conventional recruiting pools for PE firms, come primarily from investment banks where female representation is also poor.
In order to have career progression in the PE industry, it is vital that your work is noticed. Women have a lower likelihood of receiving the senior sponsorship they need to advance their professions. This might be due to a tendency to root for and mentor those similar to oneself. Furthermore, women have a less likely chance of receiving honest, meaningful feedback, be it in real-time or during reviews. Senior men have expressed their discomfort in delivering constructive criticism to younger female employees, even though this feedback is vital for the advancement in their professions and for their career path development. Studies suggest those female employees who are seen as tough, negotiate for themselves, and are deliberately networking may face a 'popularity' penalty for these traits, although these are seen as important characteristics for carving out a path in the competitive PE industry.
In addition to this, women have a greater tendency to take on more domestic responsibilities, like children and home, alongside their professional work which can cause a "double shift" for them. In the male-dominated PE sector, this gives rise to a bias. Furthermore, women are more likely to take breaks from work if they have children as compared to men, who are perceived to be the "breadwinners" of the family. This can give rise to a negative assumption of reduced professional commitment and of being not fully available. This can cast women outside the informal networks that are required for career opportunities.
Significant benefits have been observed in PE firms that have strived for achieving a greater gender balance and increasing diversity in their organizations, ranging from financial to operational advantages. Some of the strongest benefits include:
A study by Oliver Gottschalg, Associate Professor at HEC Paris, found that buyout teams that consisted of at least one woman fared much better than all-male teams across three renowned private equity deal performance indicators. The findings also suggest that committees that have at least one female member fare better than all-male committees by an average 12% of IRR and 52 cents per dollar invested. Greater female inclusion also reduced the average capital loss ratio of a fund by 8% to 12%.
Deals made by women also tended to have longer holding periods, which may indicate a more fundamental change in the company's business practices or a decision to stay onto a deal until its full value creation potential is achieved rather than selling it right away.
It has been demonstrated that diverse leadership teams help firms become more resilient while also fostering the flexibility and adaptation needed to successfully embrace change. It is undeniable that having a gender-balanced leadership team helps businesses gain a competitive edge, which raises the value of the firm and its return on investment. If companies don't take advantage of diversity and gender balance, they would fall short of the expectations of their investors.
According to a recent study by the Harvard Business Review, women outperformed men in 84 percent of the skills that set excellent leaders apart from average or subpar ones, including taking the initiative, acting with resilience, engaging in self-improvement, pushing for results, and exhibiting high integrity and honesty. This might be due to the fact that women who succeed in leadership roles are frequently held to higher standards than their male counterparts and are more inclined to hold their peers accountable.
According to DIF, diverse teams can investigate a greater range of ideas and offer a variety of viewpoints. Having a broader perspective on decision-making in areas like PE can assist the industry in transforming into a better management structure. Strong female leadership in organizations can provide distinctive perspectives on problem-solving and aid PE firms in coming up with innovative decisions by fusing many applications.
A study by DIF suggests that most women in the workforce have been found to regularly suffer microaggression as a form of discrimination. Microaggression can take many different forms, from spoken hints to behavioral instructions. In a recent DIF study, professional women reported personal encounters with microaggression in the workplace at a rate of over 64%. Women in leadership roles will tip the scales and enable PE firms to lessen instances of subtle discrimination.
A number of key initiatives can be taken by PE firms to increase gender diversity and bridge the gap:
Even if a fund takes all the steps outlined below, the action plan won't be successful if senior leadership doesn't make a clear commitment to making the essential cultural and behavioral changes.
It needs to actively advocate the benefits of greater gender parity and how it aligns with the principles of justice, respect, and meritocracy. Senior management needs to create and share a narrative that emphasizes the value of attracting the greatest talent. Recognize that companies that don't hire female professionals are passing up on talent.
To eliminate gender bias during interviews, interview targets can be a useful technique for increasing the visibility of female candidates while avoiding potential tokenism or internal resentment associated with hiring quotas. This strategy should be supported by systematic interviewing procedures where hiring standards and requirements are decided upon prior to interviews and candidates are scored as objectively as possible against a set of uniform standards.
It is essential that all staff members must receive frequent, thorough feedback on how to move up the corporate ladder. It is important to prevent gender-specific biases in the nature and frequency of this feedback. Managers need to be trained to ensure that they are able to provide solid and impactful feedback to the staff.
For female employees, how an organization handles maternity leave is a critical retention element. If handled correctly, ferocious loyalty that lasts a lifetime may result. When talent is mismanaged, it is lost.
It's critical to dispel myths about how difficult maternity leave will be or that burnout is unavoidable, especially in the early going. Both indicate that a profession in private equity is not one that women would find appealing.
Make sure senior women are noticeable during the interview and hiring procedures to show prospective employees that this is a place where talented women can thrive and that there are clear paths to their growth.
A joint industry initiative to increase the pipeline of highly skilled women should be supported or started. Private equity funds could promote the sector and offer training to high-potential, non-traditional candidates through collaborations with industry groups or business schools, especially during critical junctures like the start of business school.
According to DIF, leaders in the sector are aware of the gravity of the situation. Influential businesses in this industry are making efforts to improve their environments in order to increase the representation of women at all levels of leadership. The sector as a whole is altering its reputation, so improving the diversity landscape would be a bigger step in the right direction. The PE industry will be able to create a welcoming atmosphere to draw competent people in the future by transitioning to more gender diversity. DIF predicts that the actions taken by key players in the business would enhance the current environment in the PE sector.
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