GPs make progress on gender imbalance in private equity portfolios

Until recently, it would have been almost impossible to tell how gender diverse private equity portfolio companies were. That is all changing. With the collection and reporting of data under the ESG Data Convergence Initiative, we are starting to gain some insight into this. In public companies worldwide, just 12 percent of boards have no female members; in private equity-backed companies, the figure is nearly half (45 percent), according to Boston Consulting Group, the EDCI’s benchmarking and advisory partner.

Before long, we will have further information on female participation in senior portfolio company roles – the EDCI recently announced that gender diversity in the C-suite is being added as a voluntary metric for participating firms.

A known quantity

Initiatives like these should drive further progress at the portfolio company level, particularly as more LPs ask GPs detailed questions about what they are doing to promote diverse and inclusive environments in the companies they back.

“As co-investors and direct investors, as well as in our fund of funds, we are increasingly focusing on gathering data on gender diversity,” says Tanja Lukas, investment director, private equity, at Schroders Capital. 

“This is supported by the EDCI and by the [Institutional Limited Partners Association] questionnaires that serve as diversity metric templates. These are very helpful because they provide an overview of which metrics to look for and for some standardisation. To see diversity become the norm, we need to see standardisation.”

There are other push factors for GPs to develop their work on portfolio company gender diversity, especially those marketing funds in Europe. “Many GPs are still at the stage of collecting the data,” says Lukas. “However, since the implementation of the [Sustainable Finance Disclosure Regulation], most firms are raising Article 8 funds. That means they have to report on diversity at the portfolio company level.”

Yet while some firms may just be at the starting gates when it comes to collecting data on diversity at the portfolio company level, others have moved beyond that point and can now report results. Mid-market firm Montagu, for example, has created an in-house talent team. Lisa Telford, a partner and member of the firm’s Full Potential Partners team, focused on talent management, says: “Our annual ESG survey includes questions on the number and percentage of female board members in our portfolio companies, the C-suite and the next layer down. We also track the overall population of women in full-time employment in our portfolio companies and, increasingly, we ask companies to report on the gender pay gap in their organisations.

“We are seeing improvements – and they are quite rapid. In 2021, 50 percent of our portfolio companies had a D&I policy; in 2022, 62 percent did and the percentage will be higher this year. We’ve also seen the proportion of companies with at least one female board director or C-level executive increase from 75 percent in 2021 to 85 percent in 2022.”

Elsewhere, Triton has also built an in-house talent team. The firm’s head of human capital for the portfolio, Cécile Dutheil, says there has been progress since the firm started placing additional emphasis on attracting female talent at C-suite level in investee companies around four years ago. “Last year, we had four female CEOs in our portfolio; today, there are eight,” says Dutheil. “We do need to go further, but we are already seeing an impact in these businesses – they have a drive for cultures that value diversity in the organisation.”

Next steps

It is clearly a big step forward that many firms can now quantify how many portfolio company board and management team members are women, and that some know the size of the gender pay gap, but what happens next? How are GPs seeking to achieve a greater gender balance, particularly at senior level, in the companies they back?

Targets are one approach. “Many GPs are setting targets for their portfolio companies, such as the number of females at board level,” says Lukas. “These tend to be around 20 percent to 30 percent female board members with fairly near-term timelines – within one or two years of investment. This is often part of the strategy for professionalising SME businesses, and it requires effort to find and attract female talent.”

For sustainability-focused European asset manager Ambienta, for example, targets make sense, given the status of its latest vehicle. “Our Fund IV is an Article 9 fund so it has to be more focused on gender diversity,” says private equity partner Gwenaelle Le Ho Daguzan. “We have made a commitment to increase the diversity of portfolio company boards, with at least one female board member in place within 18 months of our investment.”

Yet not everyone believes targets are necessarily the right way forward for them. Telford says that, while Montagu frequently discusses target-setting, “there is currently a paucity of industry data and benchmarks” to work with.

Triton, meanwhile, leaves management to decide whether targets are appropriate. “We have targets for female representation at Triton, but we don’t set targets for portfolio companies,” says Dutheil. “We prefer to offer support and help them hire strong leaders – it is then for them to decide what targets they may or may not need. The 50 or so companies in our portfolio are so different and we have to respect their diversity – it’s about empowering them to set their own objectives.”

Starting from a low base

Private equity firms and their investors are well positioned to bring about change in the portfolio. This is certainly Schroders Capital’s view. “GPs can play a key role in helping companies attract female talent,” says Lukas. “We are very vocal investors on the topic of gender diversity, and we have discussions with our GPs continually. We want GPs to encourage portfolio companies to have diverse boards and senior management teams. This varies a lot from company to company currently.”

While the BCG figures on female board members demonstrate a wide gap between private equity-backed companies and public companies, it could be argued that this is more a reflection of where private companies are at the point of investment than the industry’s lack of progress. 

As Le Ho Daguzan explains: “Most of the companies we invest in are SMEs, they are primary buyouts and they are often industrial businesses. They tend to be male-centric when we invest and sometimes, for example, we need to hire an HR professional and then start from the beginning. Quite often, we have to educate and train management first before we can start working on gender diversity.”

It is a situation that Triton’s Dutheil also knows well. “It can be challenging when DE&I hasn’t been considered much in portfolio companies before we invest. It means we need to change some of the processes and you sometimes need influencing skills to help management understand why this is so important on top of all the other initiatives they have to implement.”

Cultural shifts

It is only once management is on board that culture can start to change. Actis – which has been tracking female representation on portfolio company boards, in management and in the workforce for over a decade – refers to inclusion and diversity, in that order, because the emphasis needs to be on fostering the right culture. 

“We see diversity as a statistical measure that shows you whether you can get people through the door,” says Shami Nissan, a partner and head of sustainability at Actis. “But can you keep them? That requires a focus on inclusion so that you are unlocking people’s potential and enabling them to speak up and speak out. If you get inclusion right, diversity will follow.”

3%

Investors that rate GPs’ DE&I performance at the portfolio level as excellent, while a further 41% rate it as good

Source: Private Equity International’s LP Perspectives 2023 Study

All agree that the direction on inclusivity must come from the top, backed up by data, employee surveys, mentoring and training. “You have to create the right culture if you want to attract more females into roles such as engineers,” says Dutheil. “That comes from initiatives such as unconscious bias training, but also from collecting the right data points and managing to improve these. 

“We have a leadership and culture maturity index, for example – our aim is to improve this through our ownership period. We can assess this using tools, such as annual employee surveys, that cover management, culture, compensation and so on. We also collect employer net promoter scores.”

It is clear that firms are already seeing results, but there also needs to be a recognition that making an impact here is not always a quick win. “The biggest challenges are the time required to change cultures and finding the right people,” says Le Ho Daguzan. “We have to push for diversity without lowering the quality of the people we bring into our portfolio companies. That means we often recruit younger employees or interns and train them up. It all takes time.”

Montagu’s Telford agrees: “You have to start by being clear about what your objectives are and then try to achieve them incrementally,” she says. “You can’t do everything at once or you’ll encounter fatigue or resistance. You want evolution, not revolution. You also need to be clear that this is not just HR’s responsibility; it is everyone’s. That’s driven by the CEO because tone from the top matters. When you’re hiring, you want to look at both quantitative and qualitative factors – does this person align with our values? Are they a good cultural fit?”

Above and beyond

Patience does not necessarily mean that ambitions around what can be achieved need to be lowered. For Actis, for example, female participation stretches beyond the portfolio, says Nissan. “Most of our portfolio companies have I&D working groups that include heads of sustainability, and many are now thinking about not just their own organisations, but also their suppliers, contractors and the wider community – they can use their buying power to bring about change. One of our energy businesses – Atlas – trained local women to install solar panels, for example.” 

Nissan also points to Mexican renewable energy platform Zuma Energía, which worked with universities to place women on STEM-related courses and offered women from less affluent backgrounds internships and work experience. “You have to start early to prevent gender stereotyping stopping women from entering certain careers,” Nissan adds. 

It is clear that much is going on under the hood in many private equity-backed companies regarding gender diversity. This is becoming ever more necessary, not only because of regulatory requirements and institutional investor pressure, but also as private equity investment broadens out. 

“There is a big focus on the democratisation of private equity currently,” says Schroders Capital’s Lukas. “That means the industry has to take gender diversity seriously – in the UK, for example, 60 percent of wealth today sits with women, and they tend to be focused on diversity. I think we are reaching a tipping point here as women vote with their capital; things move much more quickly when money talks, so there will be an acceleration of ESG implementation and progress.”