PE has made great strides in relation to DEI, but much still needs to be done. Dörte Höppner, chief sustainability officer at The Riverside Company, outlines how the industry can improve its DEI credentials

It is breathtaking to see how fast ESG has evolved in the private equity industry during the last 10 years. Especially when it comes to climate-related matters, the industry has developed a high degree of sophistication.

Another key topic that has taken centre stage during that time is diversity, equity and inclusion (DEI). DEI is an interesting area, not least because in the past it has been considered a ‘soft’ issue or a ‘nice to have’, but is now increasingly considered to be a performance issue and value-creation driver. 

We’ve become accustomed in the past few years to reading media reports lamenting private equity’s poor performance on DEI.

Looking at gender diversity, for example, the latest figures from Level 20 show that in Europe, just 11% of senior roles in PE are held by women. 

Meanwhile, the proportion of employees in all roles that are Asian, Black or from other non-White ethnic groups, is just 20%. However, it is worth mentioning that these figures are a considerable improvement from when Level 20 was launched back in 2015.

Why diversity?

But why is diversity important? Aside from the clear societal reasons for promoting equality and inclusion, research overwhelmingly shows that diverse teams perform better than homogeneous ones – for several compelling reasons. 

First and foremost, diversity fosters a broader range of perspectives and ideas. When individuals from different backgrounds, cultures, genders and experiences come together, they bring unique viewpoints to the table. This diversity of thought encourages creative problem-solving and innovation.

Diverse teams are more likely to consider a wider range of angles and potential solutions, leading to better decision making. Teams that bring together strong individuals from a range of backgrounds vastly increase collective knowledge and reduce the risk of groupthink.

Diverse teams are more likely to consider a wider range of angles and potential solutions, leading to better decision making

But it is more than just accessing different viewpoints. Diverse teams are often more adaptable and resilient; they can better navigate complex and rapidly changing environments because they draw upon a wider set of skills and experiences, and in a globalised world, this adaptability is invaluable. We also know that data supports the hypothesis that diversity enhances employee engagement and retention. 

Finally, diverse teams are – quite simply – more reflective of the customer base they serve. This enables them to understand and respond to customer needs more effectively, leading to improved customer satisfaction and loyalty.

All of these benefits of diversity add up to a lot. A recent McKinsey study of German and UK companies found that return on equity was 66% higher for firms with executive teams in the top quartile for gender and ethnic diversity than for those in the bottom quartile. For the US, the difference was even greater. 

By fostering innovation, adaptability, employee satisfaction and customer-centricity, diverse teams consistently outshine their homogenous counterparts. Recognising and promoting diversity is not just a matter of social responsibility, therefore, it is also a major strategic advantage.

Getting better

So how can we improve DEI in private equity? First, by being aware of it and talking about it, and on this note I am pleased that in the US and Europe, DEI is now at the very forefront of the ESG conversation. 

Second, we need to address a structural issue. One of the key reasons for gender and ethnic imbalance is the insufficient attraction of diverse candidates at entry-level positions. We need to sell the private equity industry more effectively at an earlier stage, actively approaching students from different backgrounds with information on what we do and why it is so professionally rewarding, in order to build a strong talent pipeline. 

We need to sell the private equity industry more effectively at an earlier stage, actively approaching students from different backgrounds

Yes, private equity is a tough industry to succeed in, but it is also one of the most rewarding in terms of professional experience – offering the opportunity to work across a wide range of industry sectors, have a huge impact on the growth of companies and work in what is often a highly entrepreneurial environment – and we need to do a better job of explaining this.

To end on a positive note: DEI has become a genuine, industry-wide goal for private equity. While we are not there yet, as an industry we continue to make progress and there are some excellent initiatives underway to help us go further and faster. Riverside is a proud supporter of Level 20 and believes that while change will not happen overnight, it is an important part of the jigsaw for achieving genuine inclusion in the industry during the years to come. 

Remember: diversity is being invited to the party; inclusion is being asked to dance.

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