By Melissa Borschnack, Director and Sophia Siddiqui, Senior Manager at GRAPH Strategy
The private equity market has been buoyant over the past 18 months, with an increase in both the number and value of deals. Alongside this growth in deal volume and size, firms also achieved record-breaking fundraising, another indicator of a red-hot market.
In this competitive market where private equity firms need to move faster, pay higher multiples, and have more conviction in their decisions, every advantage is meaningful.
Increasing diversity in deal and diligence teams is of increasing importance in this challenging deal environment. A diversity of perspectives can bring to bear identification of corporate/legal risks, innovative new use cases of products, and purchasing behaviour nuances that may have otherwise been missed by a more homogenous team.
At the same time, driving towards higher levels of female representation can allow private equity firms to strengthen their talent pipeline, realise greater levels of employee engagement and retention, and deliver stronger performance against business metrics.
The importance of women on private equity deal teams
It’s no surprise that women are a key input in the economy and in spending decisions. They control about $32 trillion in annual consumer spending globally, according to Catalyst. In fact, Forbes notes that in the U.S., women direct approximately 80-85% of consumer spending.
Women are making strides in the workforce and taking on more positions where they influence or make decisions for companies. Therefore, understanding women’s perspectives is critical to successfully conducting rigorous analysis that correctly considers women as major decision-makers, whether as an individual consumer or a corporate buyer.
Private equity firms have made some progress, but Prequin’s Women in Alternative Assets 2021 report notes that just 20.3% of the industry’s employees were female at the end of 2020, up slightly from 19.7% in 2019. This number falls even further when looking at leadership positions, with women accounting for only 12.2% of senior roles and only 5.2% of board seats at these firms.
The benefits of diverse deal and diligence teams
Teams with more diversity and greater gender representation are able to leverage each individual’s unique background, experiences, knowledge, and thinking, leading to more thoughtful and robust insights to inform the investment thesis.
In our experience as a commercial due diligence provider, we’ve witnessed how diverse teams can deliver unique insights to clients.
- Identification of corporate/legal risks: When performing a diligence for a private equity firm on a target in the personal care services industry, the addition of a woman on the diligence team raised salient points around how women perceive the level of risk associated with certain activities, which may correlate to higher legal and corporate liability/exposure.
- Surfacing of innovative use cases associated with target product: In another diligence performed for a private equity client, a diverse team discerned new applications of a target’s core product. The team’s variety of perspectives and experiences enabled them to tap into the unmet needs of a key customer segment, which could be met through improved positioning of the target’s core product offering.
- Identification of purchasing behaviour nuances of a core customer segment: During a diligence in the e-commerce platform space, one of our woman team members was able to quickly connect dots and test hypotheses since she was more familiar with a broader array of online shopping experiences and could therefore identify issues that might not have been readily apparent to an all-men or single-race team.
By understanding customers’ perspectives of the target asset, deal teams uncover insights pertaining to true strengths, challenges, and opportunities to inform product and service quality, brand equity, key purchase criteria, and sales team quality. However, turning the raw feedback into quality insights requires significant art (and science). This is where having diverse perspectives and experiences add value.
How to continue building progress
The improved outcomes associated with diverse deal and diligence teams, paired with a broader cross-industry movement towards Diversity, Equity and Inclusion, and increasing investor interest in diversity, will continue to drive greater rates of women and minority representation in the PE industry. Understanding what stands in the way of achieving such benefits is vital to creating a path for more balanced representation.
Private equity firms’ efforts to date to achieve balanced gender representation can serve as the foundation for future progress, particularly as the industry seeks to close the representation gap on deal teams and in senior positions. As noted in BVCA’s (British Private Equity and Venture Capital Association) Diversity & Inclusion Report 2021, 88% of firms surveyed have gender-diverse investment teams, compared with 67% in 2019 and 72% in 2018.
Achieving gender representation is important, and central to that is creating workplace environments that are supportive of women and the structural challenges they often face.
Some key tactics to consider when driving forward are outlined below:
- Acknowledgement of unique challenges faced by women: Achieving the benefits associated with diverse deal teams requires awareness and acknowledgement of the unique challenges women face in industry. Listening to and understanding these challenges can allow firms to take concrete steps to addressing these hurdles to build (and retain) more balanced teams and ultimately, perform more effective diligence exercises that enable positive investment outcomes.
- Providing exposure to private equity careers early on: Men typically have more exposure to private equity career opportunities early on in their lives compared to women. Part of this stems from the smaller number of women in industry at large, alongside the lack of women role models in the space, ultimately feeding into a pipeline reflective of the existing, male-dominated workforce. Private equity and other industries have taken steps forward in diversifying talent pipelines; continuing to reinforce the need for diverse teams and seek out non-traditional talent channels is key to delivering exposure to a diverse pool of candidates.
Overall, the representation gap presents an opportunity for private equity firms to identify ways to better attract and retain women. By driving greater gender diversity across the industry, firms can allow for an improved breadth of perspectives when conducting diligence and evaluating business models.
Diverse deal and diligence teams bring a broader network of relationships and myriad different experiences and perspectives that can be vital in relating to management teams, as well as to assess and close deals that ultimately result in greater outcomes and higher returns.