US buyout activity hit an all-time high in 2017, and a post-crisis high for value, with a total of 1,176 announced deals adding up to a total of US$190.76 billion. A new record was also set for global buyout volume, while global value similarly reached a post-crisis high.
But how did women in the sector fare? And what’s the outlook for women in PE going forward?
According to Preqin, women account for only 18 percent of employees at PE firms globally. Moreover, women occupy a mere 9 percent of the senior positions at PE firms globally. And the figures have been remarkably static in recent years—for example, the number of women in senior positions at North American PE firms has toggled between 10 and 11 percent since 2013.
By any metric, progress has been slow. Yet there are reasons for optimism that don’t show up in this data. Trends suggest that we may be approaching a turning point thanks to a confluence of factors that could change the economic incentives for PE firms. Below we highlight three interrelated trends that could open the sector to more women.
1. Research indicates that companies with more women are more profitable
A growing body of research finds a strong correlation between gender balance and financial performance at companies—including studies published by McKinsey & Company, The National Association of Investment Companies (NAIC), the Peterson Institute for International Economics, Credit Suisse, MCSI, and the International Monetary Fund.
McKinsey found that return on equity for companies that ranked in the top quartile for the number of women on their executive committees was 47 percent higher than companies that had no women on their executive committees.
NAIC came to similar conclusions in research it recently published about PE firms: funds included in the NAIC Diverse Private Equity Index outperformed both the median- and upper-quartile funds in the Cambridge US Private Equity and the Cambridge US Buyout indices.
Why would this be the case? McKinsey sums up what appears to be a growing consensus view on the topic: “diverse companies…are better able to win top talent and improve their customer orientation, employee satisfaction, and decision making, and all that leads to a virtuous cycle of increasing returns.”
2. Clients increasingly demand that PE firms promote more women to senior positions
Institutional investors are leading the way in pressing PE firms to increase the number of women in their ranks. Inspired by the research on gender and performance, state authorities have increasingly encouraged state pension funds to address gender balance at companies in which they invest, including PE firms.
Authorities in New York, Massachusetts and Illinois require companies to report information about gender diversity, and state institutions use diversity criteria to guide their investment decisions. For example, the New York City Comptroller’s Office requires companies to fill out surveys about the gender composition of their boards and among their investment professionals—and diversity data is formally used as a criteria by the City’s five pension systems in determining which companies, including which PE firms, to invest with.
Other funds have pursued gender balance despite mixed messages from law makers. The California legislature passed a resolution in 2013 calling for gender balance on corporate boards, and executives at CalPERS have indicated that they have targeted PE firms with women in leadership positions since at least 2013. This is despite the fact that a successful 1996 proposition prohibited state agencies in California from using gender-based criteria when hiring investment managers.
A slew of private companies—including BlackRock, Vanguard, Fidelity and State Street Global Advisors—have also set gender-focused policies that affect how they select companies for investment. Many of these have already taken action on the issue, including voting against new male nominees or the reelection of sitting board members for companies that have all-male boards.
And a number of advocacy organizations are addressing the issue. Perhaps the most influential example of which is the 30% Club, a global organization that is dedicated to increasing the number of women on boards to at least 30 percent. Members of the US chapter include Larry Fink, Chairman and CEO of Blackrock; Henry R. Kravis, Co-Chairman and Co-CEO of Kohlberg Kravis Roberts; Emmanual Roman, CEO of PIMCO; and Robert W. Ferguson, Jr, President and CEO of TIAA-CREF.
3. PE firms increasingly recognize the opportunity cost of gender imbalance
Women make up 50 percent of the talent pool, and PE firms see the research and feel the pressure from clients on gender balance. Many realize that they can increase their competitiveness by more effectively tapping into the rich pool of talented women who are interested in the sector.
An increasing number of PE firms are focusing on recruiting and retaining more women. Some firms—such as KKR, Carlyle Group and Blackstone Group—have set policies to make work more accommodating for women (or perhaps more accurately, parents), such as extending parental leave policies, providing more comprehensive childcare benefits, and offering more flexible work arrangements. Others have stepped up mentoring and coaching programs for women. And some have experimented with female-only recruiting processes (although firms that do this should take care to ensure they don’t violate discrimination laws).
Firms may often have to go a step further and consider changing their cultures to ensure they are welcoming to women at every level in the organization. One way to do that is to take lessons from women who have succeeded in the profession. Level 20, an organization focused on women in PE, is working with the University of Cambridge to research women’s career paths in PE, and it will publish a report in 2018 highlighting success factors for women and firms. Such efforts could prove invaluable to firms that are serious about addressing gender balance.
These trends are not unique to the US. In fact, they may have started in Europe, and they certainly remain strong there. Moreover, according to Preqin, female representation in PE firms is higher in both Greater China and Africa than it is in either Western Europe or North America. So these are global trends. And although they may play out differently depending on country and region, it seems that the PE industry in its totality is moving in a new direction that may already be bringing about real change.
