The link between diversity and positive business performance has long been made. In recent years, the evidence has become overwhelming; data published since 2019 from both McKinsey & BCG has shown that a business ranked in the top quartile for diversity in their industry will materially outperform the bottom quartile in both growth and profitability metrics.

Private equity investors are continually seeking to pull levers which add value to their portfolio businesses and the penny has seemingly dropped when it comes to diversity. A recent report by Prequin suggested that the "majority of the alternative investment community recognises that diversity of gender, experience, and cultural backgrounds in the workplace is a powerful defence against groupthink, can sharpen a team’s decision-making ability and improves investment outcomes".

It would seem, therefore, that bringing more diversity to Board tables would be a clear priority for Private Equity investors. However, the evidence of progress on this front – both statistical and anecdotal – does not seem to support this. For example, research by Heidrick & Struggles last year showed that in the UK’s largest businesses, 95% of CEO hires in 2020 were male, an increase from 93% in 2019 and 91% in 2018. 

Similarly, a 2018 report by INvolve showed that there were more FTSE 100 CEOs named Dave and Steve than there were women and ethnic minorities. Research by Equality Group last month has shown that in the past three years, the only change is that it is now the Steves and Andrews that combine to outnumber the diverse CEOs.

There are fewer data points to draw from when looking into how diverse the make-up of Private Equity Boards are, but the consensus seems to be that the progress over the past 10 years has not been as substantial as one might imagine given the undeniable evidence for value creation.

One possible explanation is that diversity is too abstract a topic – most statistics talk about the benefits across a wider industry or portfolio – which can make it difficult to apply to a single Board hire in a single portfolio company. As a result, the risk of making the wrong hire may be perceived as too high. Applied to a single data point, there is no guarantee that making a diverse hire will add value and therefore investors may find themselves naturally returning to ‘safer’ profiles that fit the tried and tested private equity mould (“been there, done that”) and miss out on the opportunity to bring more diversity into their portfolio leadership team.

Another explanation is a perceived lack of high-quality diverse candidates - understandably, investors are eager to employ the best possible candidates in key roles in their portfolio businesses, but what ‘best’ actually means has not evolved hugely in recent years. In his book Rebel Ideas, Matthew Syed argues that to take advantage of diversity, organisations must “view performance from a fundamentally different vantage point”. However, the private equity vantage point has not diversified hugely – in Level 20’s recently published D&I review, it was noted that a remarkable 54% of UK investment teams are all white. By changing the criteria for what ‘best’ means (for example, placing more emphasis on the value creation potential of diversity around the Board table) and applying this to decision making, hiring and promoting diverse candidates should become more commonplace.

The good news is that many funds are taking significant steps to encourage hiring decisions that favour diverse candidates. Carlyle, for example, has established Board-level diversity targets across their portfolio with outstanding results: the average earnings growth of its portfolio companies with two or more diverse board members has been approximately 12% greater per year than companies that lack diversity.

Positive and quantifiable action from more funds should aid in changing the value found in diversity from the abstract to the material. No doubt the increasing pressure from investors in PE funds – 40 of the largest LPs signed up to the Institutional LP Association’s Diversity in Action initiative in December last year – will see further positive development on this front.

Other funds are taking a longer-term view when looking to improve the supply of high-quality Board-level candidates from diverse backgrounds; in December last year, Advent launched a joint initiative with Harvard Business School to offer a corporate training programme for underrepresented professionals across its US portfolio companies. Many other funds are devoting more and more resources to promote gender, racial and demographic diversity both at fund and portfolio level, which suggests that, in time, those that do not will risk becoming lower quartile performers.

At Equality Group we are continually searching for candidates that can add a new or different perspective around the Board table. This requires looking both inside and outside of the traditional talent pools and working with funds that have something similar to Syed’s different vantage point where diversity is valued equally to intellect, sector and prior private equity experience as a predictor of potential future performance.