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​Unravelling the Impact of DE&I in Private Equity

Today's progressive funds and businesses actively prioritise and champion diversity, equity, and inclusion (DE&I). While this triad is broadly understood and endorsed, the intersection of these concepts, particularly their influence on business outcomes, remains an area ripe for exploration. In particular, what DE&I means to your fund or business.

The tripartite ecosystem of General Partners, Limited Partners, and portfolio companies in Private Equity can thrive by adopting a robust diversity framework. This framework enables diverse talent to foster meaningful connections, leading to the formation of high-performing teams. The efficacy of such teams is made evident through quantitative measures—such as innovative financial structuring, superior investment returns, and reduced risk across portfolio companies — and qualitative metrics, like elevated employee morale and stakeholder satisfaction. Therefore, emphasising DE&I signals a Private Equity fund's dedication to nurturing a positive and inclusive work environment.

Making a Business Case for Diversity, Equity, and Inclusion

Given the inherently collaborative nature of business operations, incorporating DE&I strategies alongside broader business objectives is essential. Diversity should not be considered a side issue but rather a powerful enabler. This starts by fostering an inclusive and equitable space for underprivileged and minority groups spanning various categories, including gender, ethnicity, culture, socioeconomic status, sexual orientation, and neurodiversity. By providing equal and accessible opportunities to these groups, a fund will likely embark on a path to success, with the benefits manifesting in improved investment returns and risk metrics.

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Exemplary Investment Returns

Since perspectives and skills are inherently subjective, a diverse team offers a broader range of experiences and viewpoints, leading to stronger returns. An IFC study underscores this assertion, stating that teams with higher gender representation in leadership positions have been statistically shown to yield higher valuation multiples and superior returns. Specifically, venture capital-backed companies in emerging markets have demonstrated a 1.6x increase in their step-up valuation or distinct valuations between financing stages. The step-up valuation is 5% higher for gender-balanced leadership teams versus teams comprising 10 – 30% women, and it is 13% higher than leadership teams with less than 10% women (von Friedeburg et al., 2019). Additionally, diverse teams often boast an expanded network, facilitating smoother integration, partnerships, and negotiations, premised on shared understanding and familiarity.

Superior Risk-Adjusted Performance

A 10% increase in diversity within a specific timeframe led to an approximately 1.5% boost in IRR in the realm of Venture Capital (Gompers et al., 2019). Buyout funds with even a single female member benefit from a 12% IRR increase and a 0.52x higher TVPI than all-male teams (Gottschlag, 2019). Furthermore, buyout funds led by teams diverse in gender, age, and nationality tend to generate higher returns and multiple expansions (Mirchandani, 2022). EY's research also indicated that lead partners from diverse sociodemographic backgrounds in Private Equity funds contribute positively to the performance of buyout funds. Boards exhibiting gender diversity tend to demonstrate more consistent financial policies and lower risk (Bernile, et al., 2018). These statistics and studies reinforce the correlation between diversity and superior risk-adjusted performance.

Conclusion:

Although significant progress remains, Private Equity funds that seriously and consistently leverage their DE&I strategies have successfully built diverse teams have achieved commendable financial outcomes. The range of areas where diversity can be implemented is vast, allowing for innovative approaches to this crucial issue and demonstrating its attain.

We call upon business leaders, human resource professionals, and every passionate individual ready to take action on DE&I to reach out to Altus Partners, your experienced guide in this transformative journey. With our extensive industry knowledge and expertise in developing impactful DE&I strategies, Altus Partners can help you integrate these practices seamlessly into your business or fund.

Every effort counts, every person plays a role, and every organisation can benefit from an expert hand to guide them. It's time to lead with DE&I, and Altus Partners stands ready to help you navigate this critical initiative: info@altus-partners.com