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Breaking barriers and building value: The impact of DE&I in private equity and M&A

Breaking barriers and building value: The impact of DE&I in private equity and M&A

By Karen Dawaf, Managing Director, Arrowpoint Advisory


As ESG rapidly moves up the agenda for all organisations, the issues of diversity, equality and inclusion can no longer be tick-boxes on a checklist. These important issues are integral to both effective business decision-making and brand image – whether organisations are looking to invest, seek investment themselves or attract the very best talent.  

Across the private equity community, the ability to fundraise has been adversely impacted by the current economic climate and Limited Partners (LPs) are increasingly looking for differentiation as part of their investment criteria – diversity is increasingly important in this regard, and it is forcing the agenda across the market.   

The current state of affairs 

Whether they are looking to meet stakeholder demands, access capital, win deals or compete for talent, standout companies are those that can demonstrate their progress against DE&I metrics by amending their recruitment and retention policies appropriately. 

The pressure to do so means that the structure of the private equity industry is changing, not only within the sector itself but also in terms of the companies that firms are looking to bring into their portfolio. Although recruitment of diverse candidates is still taking significant time to filter up to leadership positions, the fact that this change is happening at entry-level positions is an encouraging advance for the industry. 

A longer-term transformation is starting to unfold, albeit slow in the making and yet to significantly influence top-down changes in culture. As a predominantly male-dominated industry, it is the responsibility of senior figures in private equity to push diversity harder and faster, and to extend it to their leadership teams. In 2022, a study from the business school HEC Paris revealed that just 11% of senior leadership positions in this sector were taken up by women, and while this shows progress since 2007 when this figure was just 7%, there is now an opportunity to acknowledge bias and work positively towards driving positive change at an accelerated rate. 

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The hidden causal relationship 

As PE funds actively pursue diversity and inclusion agendas, their revised mindset is filtering through to the companies that they invest in too, including an increase in BCorp rated investments. This provides a rather unique opportunity to make widescale advances in Diversity, Equality and Inclusion (DE&I) within the wider business community, especially thanks to the range and scale of businesses within private equity portfolios. 

The ability to impact the status quo means that private equity houses become influencers in their own right. As majority – or even minority – shareholders in businesses across a range of industries, private equity funds can drive change, whether that’s encouraging a more diverse hiring process or integrating DE&I within leadership teams, if not because it is the right and equitable thing to do, then because it directly impacts the bottom line. 

Diversity can also unlock additional levers to gain increased traction in financial performance such as broadened skillsets and talent pools, and greater innovation and creativity. Research shows that companies that have greater diversity at the top are more likely to generate stronger financial results – investment committees with at least one female outperform male dominated ones, according to the same research by HEC Paris aforementioned. 

The private equity industry can pioneer real change through the levers of recruitment and retention by re-evaluating and redefining hiring criteria. This is especially important for an industry where there is intense competition amongst companies to not only win the best talent for their investment teams, but to retain it too. 

Potential employees are increasingly expecting the businesses they work for to not only make DE&I a consideration, but to be trailblazers in this regard. Paying token lip service to it is just no longer enough, especially when women in any business need to see more tailored support when it comes to their career, including things like stance on maternity leave and return-to-work support. Having the right policies to back up the company rhetoric is vital.

While ensuring diversity, equality and inclusivity in the private equity sector isn’t a quick fix, the opportunities it offers, both for the private equity industry as a whole and the portfolio companies that they invest in, are reason enough to accelerate change. It must be an integral part of ESG policies, both because it’s a proven and significant factor in positive business performance, but also because such policies are going to be ever more closely scrutinised from a compliance perspective. Private equity houses that take positive and decisive action increase their ability to attract and retain the best talent while legitimately improving their own bottom line, ultimately impacting not only their own survival but that of their portfolio too. 

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