Private View Blog: Private equity - why it pays to get women in on the deal
In the traditional white, male-dominated private equity world, firms could do worse than take urgent measures to increase the percentage of women on their investment committees, as this will significantly improve the performance of their investments and reduce the failure rate of their deals.
A recent empirical study from Business School HEC Paris, a first of its kind, shows there is a 12 per cent annualised return difference between deals finalised by a gender diverse investment committee and those completed by a male-only one. But the outperformance is not due to higher risk-taking. On the contrary, investment committees including female points of view tend to be more risk averse, and outcomes have a meaningfully lower loss ratio. Only 12 per cent of deals do not return capital, versus 20 per cent implemented by a male-only investment committee.
Such findings emerge from the analysis of 2,500 buyout transactions - those providing information about the identity of the lead manager - out of a database of 10,000, and completed over the past 15 years up to 2015, in both Europe and North America. Within the sample, less than 10 per cent of deals were led by women.
Gender diversity is a driver of performance, explains the author of the study, Oliver Gottschalg, private equity expert and professor of Business & Strategy at HEC Paris. The findings should encourage fund selectors and limited partners to integrate this additional filter in their due diligence.
But worryingly, the percentage of female investment executives assigned to deals has decreased in the past couple of years. A key reason for this difficulty in recruiting women is that private equity firms have historically recruited people who have cut their teeth in consulting firms, investment banking and leveraged finance in particular. These are all heavily male-dominated environments.
Private equity firms should take inspiration from large consulting firms, and source high quality female professionals from all kinds of fields and then train them, suggests Professor Gottschalg. Initiatives like Girls Who Invest, a US non-profit organisation dedicated to increasing the number of women in portfolio management and executive leadership in the asset management industry, are also proving useful.
Financial institutions should open internship and mentorship programmes and try and debunk some of the myths about working in the private equity space. Female networks in private equity are also beneficial, such as the UK'S Level 20, or US-based Wave, focused on improving gender diversity in the industry and protecting women in a tough environment, where it may be difficult to break into an old boys’ club.
There are, however, unintended consequences of any regulation prescribing female quota at board levels, as this may deplete the already poor ranks of senior executives, warns Professor Gottschalg.
A more diverse workforce would also address short-termism in the industry. The average duration of a transaction is longer when completed by a gender-diverse investment committee, according to his analysis, which suggests transactions are “more transformative” for the target company, and not the “quick fix, quick flip” of the default male-only deals.
“The combination of different viewpoints is challenging what has become a slightly aggressive norm in private equity, aiming at squeezing out as much as possible of the businesses in the short term,” comments Cath Dovey, chair of Rosa, a UK charitable fund set up to support women, with leadership and representation one of its priority areas. A broader range of perspectives at the decision-making table would steer private equity firms towards investing with long-term horizons, in line with the industry’s original goal.
Elisa Trovato is deputy editor of Professional Wealth Management. Follow her on Twitter @elisa_trovato
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