Women in Private Equity Portfolio Operations: How to Achieve Progress and Performance in the Industry

Acertitude is honoured to have hosted the first annual Women in Private Equity lunch and panel at the recent PEI Operating Partners Forum Europe, the largest European event for private equity value creation. The event is attended by more than 100 operating partners from premier global investment firms such as Advent International, Apollo, Bain Capital, CVC Capital Partners, Searchlight Capital Partners, Warburg Pincus, and others. This honest and important session surfaced clear opportunities for the industry to do better and perform better, especially when it comes to diversity, equity, and inclusion.

While women represent one third of the total private equity workforce, the number dwindles up the career ladder, with few women in senior roles. Even fewer are represented among portfolio operations team members. Compared to corporate America for example, in which 24 percent of C-suite roles are held by women, private equity only has 15 percent in senior positions. On the same note, in a McKinsey poll, 54 percent of women said they believe their “career trajectory is limited, or evaluation for promotion is somewhat slowed, due to [their] gender.” In essence, gender parity for promotions, especially for women in private equity, lacks at each rung of the ladder.

If it’s needed, the business case for diversity is there - it is repeatedly shown that diverse teams outperform their less diverse counterparts. On gender balanced top investment teams, the internal rate of return is 20 percent higher (World Bank Group IFC). Another analysis by FCLTGlobal found that the most diverse boards added 3.3 percent to return on invested capital compared to less diverse peers. For gender diversity, the number was 2.6 percent​. In a study of its portfolio companies, Carlyle found that firms with two or more diverse board members recorded 12 percent higher annual earnings growth, thereby strengthening all facets of value creation.

Bottom line: diverse teams and diverse investment firms perform better. All stakeholders — LPs, GPs, portfolio companies, customers, and others — stand to benefit. Good places to start with portfolio operations, the panellists said, are in addressing hiring processes, top team assessment, workplace culture, and sponsorship and coaching practices.

Attracting top talent

The next generation of leaders looks different and value different things in comparison to previous generations. Both Millennials and Gen Z want to work for organisations with strong values and purpose, in addition to having the expectation that said organisations are reflective of diversity. Rising generations, while passionate about diversity today, are equally as committed to driving future change. C-suite executives investing in their long-term talent pipelines should be prepared to recruit young, high-potential candidates who are large proponents of social change and ESG initiatives. The pendulum has swung in favour of organisations that stand by diverse principles.

External perspective

When candidates consider any organisation to work for, they look for cues that showcase a path for future growth. For example, when an individual looks at the team page of a website, they want to see themselves reflected in the diverse leadership. Websites that have diverse representation allows for females and those of varied backgrounds the ability to envision themselves as part of the leadership ranks.

Intrinsic motivation

During COVID, working parents thrived when granted optionality in their workdays, whether flexible hours or place of work. In a post-pandemic world, continuing to provide these high performers with the autonomy to get the work done on their own terms and in more effective, purposeful ways is crucial to enabling all parents to play a part in carrying the domestic weight at home.

Flexibility has become a non-negotiable, leading to a more effective and purpose-driven way of working. If a firm aims to attract the best, diversified talent on the market for portfolio company leadership, there are some creative manners in which they can strike a balance. Bottom line: a conversation is necessary to understand a candidate’s personal motivations. Don’t miss out on the best person for the job; instead, maximize trade-offs, like hybrid work models.

Widening the talent pool

Unconscious bias exists, and it’s not easy to navigate. This means that those involved in the hiring process need to be deliberate in reducing categorization and eliminating social stereotypes. Having diversity in the hiring committee will also ensure top performers don’t get overlooked. To widen the talent pool is to look at candidates with a fresh lens, regardless of social associations.

For example, many women in the room spoke of the stigma associated with getting married and having children. Subconsciously, this can have candidates – either external, for hire, or internal, for promotion – labelled as potential financial “losses,” leaving companies with a critical gap during maternity leave, and there’s assumptions made that there’s no way she can keep up the same pace anymore. This notion not only handicaps firms and portfolio companies but will allow competitors to reap greater rewards. It is vital to secure top talent for who they are – not what their future circumstances may be. Additionally, females in the audiences noted that becoming mothers led them to becoming more empathetic leaders, increased their ambition, and gave them a stronger desire to work harder to further provide for their children and to drive positive future change.

Merit-based selection

To widen the talent pool and remain as objective as possible, review processes are becoming more data-driven than relationship-focused. Companies have attempted to remove names from resumes to reduce biases, as well as ensure a diverse panel is responsible for hiring decisions, strengthening a broader point of view.

It has become a necessity to assess critical values. One operating partner mentioned that she knew of a role in her past in which graduates from a certain university tended to be considered, because it established a level of initial rapport, i.e., translated to “cultural fit.” To eliminate this level of selectivity, it is necessary to implement a highly structured approach to fairly evaluate candidates; the values they embody, and whether, ultimately, they fit the job scorecard based on skills, experience, and competencies.

DEI impact

As a whole, diversity, equity and inclusion is a measurable metric that plays directly into team effectiveness and should be at the heart of the value creation strategy.

Firms are tracking differing elements of DEI across all portfolio companies, by measuring items such as race, gender, language and pay equity across employees and prospective talent pipelines. Setting key performance indicators, as well as engaging in DEI initiatives will undoubtedly increase employees’ perception of an organisation’s cultural engine. These activities will ultimately increase internal satisfaction, and in tandem, ROI at scale.

Every .1-point improvement in DEI ratings for a company (on a 5-point scale) was linked to a corresponding 13 percent increase in absolute change-power score on average. Research notes that change-power is associated with a 2x improvement in EBITDA, 2x in total shareholder return, and 1.5-3x in overall revenue growth (Harvard Business Review).

Impact can also be made by implementing mentorship and sponsorship programs. While both are effective at fostering diversity, the audience pointed to sponsorship being especially meaningful. An operating partner noted that earlier in her career, a male leader believed in her, took a chance on her, and gave her the opportunity to step up in the organisation. She has excelled, but the opportunity itself wouldn’t have been possible without the endorsement and recommendation of a respected, senior leader.

Closing thoughts

Ultimately, it’s up to all individuals to increase visibility and promote inclusion efforts. In order to push positive change forward, all constituents need to lead by example and champion others. It’s a marathon, not a sprint, and progress needs to be lived and breathed every day.

Women in private equity want to be further ingrained in this world, and there are many opportunities for more females and diverse candidates to join the ranks. At the same token, firms must remain cognizant of the intrinsic motivations that propel these candidates, ultimately leading to long-term retention, and set diversity requirements. Over the long haul, this directly impacts value creation.

DEI advancement is achieved through conversation. Women can cultivate a mindset of abundance and have the courage to ask for things. At the same time, we all need to advocate for women, and bring them up the ladder when given the opportunity. There are many seats at the table, and there is nothing more empowering than women helping other women succeed.

We thank all our sponsors, allies, future allies, and those who stayed to listen to this important conversation through the last session of the second day. Discussions of this nature are necessary to continue attracting one hundred percent of the best talent. Better leaders drive better returns for everyone.

Acting on diversity, equity, and inclusion isn’t just the right thing to do and a smart move for society, it’s the smart move your businesses, too.