Connecticut Retirement Plans and Trust Funds is encountering challenges with applying diversity data from European fund managers to its own frameworks, Connecticut State Treasurer Shawn Wooden tells New Private Markets.
“It would help in my deployment of capital to European managers if information [about diversity in a firm’s workforce] was more readily available.”
Connecticut has assets worth $44 billion and a 10 percent allocation to private equity. It has backed managers like Intermediate Capital Group, Goldman Sachs Asset Management and Clearlake Capital Group.
“In the US, we have a very robust system and standard definitions around racial and ethnic demographic data. In Europe, it’s very different in terms of what is collected and shared and what you can actually ask employees,” Wooden said. When Connecticut does receive internal staff diversity data from European GPs, “it often presents more of a challenge to doing an apples-to-apples comparison. But we do our best to dig in.”
New Private Markets recently identified an error within the pension system’s diversity data relating to prominent European manager Hg Capital. Connecticut incorrectly reported to its investment advisory council that at Hg, a UK-headquartered private equity firm, minorities hold 50 percent of executive/senior-level official and manager roles – 12 out of 24 roles at this level. All 12 individuals’ racial backgrounds are listed as “prefer not to say” in a due diligence report accompanying a January 2022 investment advisory council meeting, where Wooden proposed investments of €75 million to Hg Genesis 10 and $150 million to Hg Saturn 3.
This was a clerical error from Connecticut’s treasury office, Wooden says. A contributing factor was the fact that Hg’s data included a “prefer not to say” option. “We’re not accustomed to that category and we don’t have that on our form.” Hg declined to comment.
Connecticut’s diversity protocol states that managers that “wish to do business with Connecticut must disclose their firm’s workforce diversity statistics in a form prescribed by the State Treasurer during the RFP or search process. Workforce diversity shall be considered by the Treasurer when making his/her decision to recommend a firm to the IAC, and the Treasurer’s recommendation shall include his/her analysis and conclusions regarding the diversity profile of each firm recommended.”
GPs’ ethnic diversity statistics are “not the make-or-break decision point. There just may be other questions that might take up time.”
Shawn Wooden, Connecticut State Treasurer
Why is this a struggle?
In the UK, employers can collect employee diversity data and are permitted to process this data for the purpose of monitoring equal opportunity and treatment between groups. UK employers cannot make it mandatory for employees to provide this data, law firm Osborne Clarke explains.
The European Union prohibits employers from processing data of employees’ racial or ethnic origin unless the employer has received explicit consent from the employee to do so for a specified purpose.
In the US, employers with more than 100 employees are required to submit gender and race/ethnicity data of their workforce to the US Equal Employment Opportunity Commission.
How important is diversity to Connecticut?
GPs’ ethnic diversity statistics are “not the make-or-break decision point” for Connecticut’s investment advisory council, Wooden said. “There just may be other questions that might take up time in a three-hour meeting with a group of volunteer advisory council members.”
Wooden, his staff and investment consultants “spend perhaps no less than nine months in diligence with managers”, Wooden said. The investment advisory council then receives a 20-minute due diligence presentation in the council meeting. The council “might drill down more on the performance track record or how this strategy fits within our broader portfolio and goals”. In the January council meeting, “they received a presentation on this, and [Hg’s diversity data] was not one of the questions that have come up”.
Wooden continues: “As Treasurer, I and the team are very focused on the degree of diversity, equity and inclusion within our investment managers teams. We ask every manager to produce demographic, racial, ethnic and gender information as part of the standard due diligence process. And I meet with every manager personally and review all the diligence prior to making an investment decision.”
Progress, not perfection
“In my first meeting with Hg in 2019, it was clear to me that they actually reflected for the industry some good progress on gender diversity,” Wooden said. “But it was very noticeable to me that they did not have similar progress with respect to ethnic diversity. And so in my first meeting with them, we spent a good portion of time talking about that. Hg responded exceptionally well to those conversations and expressed a level of commitment.”
Fifty-three percent of Hg’s executive hires in 2020 were women, the firm’s annual D&I report shows. Hg established a D&I steering group in 2020, led by the firm’s deputy chief operating officer Martina Sanow. Connecticut first backed an Hg fund in 2020 and has committed at least $312 million to the manager prior to the most recent investment proposals.
“I don’t look for perfection on diversity. I look for progress and commitment,” Wooden added. This is reflected by Connecticut’s diversity policy, which requires financial services firms it works with to implement written diversity policies that “recognise diversity as an enduring commitment, requiring ongoing efforts by the firm and periodic assessments of their progress”.
Across its private and public markets strategies, the pension fund has an allocation of between 5 and 10 percent for emerging and diverse managers in public and private asset classes. Its investments in Hg are not part of this allocation, a spokesperson for Connecticut confirmed.
‘Meets my muster’
Nobody at the pension’s investment advisory council meeting called out the clerical error that first led to this conversation. Does that mean the council is not as interested as Wooden is in managers’ diversity data?
“No, I wouldn’t read it as not interested in diversity,” Wooden said. “There’s no one on the investment advisory council that for a second questions my commitment – and my team’s – to this issue. If it meets my muster, trust me, it meets everybody else’s.”