Get ready for tough conversations about DE&I – and more of them

Investors’ views over the importance of DE&I issues and whether they ultimately affect fund commitments are as varied as the LP community itself.

A recent Pennsylvania State Employees’ Retirement System investment committee meeting provided a window into the industry’s ongoing struggle to reconcile efforts to promote diversity, equity and inclusion, with the desire to deploy capital and maintain relationships with performing managers.

In June, the US public pension’s investment committee approved $125 million in commitments to two Sentinel Capital Partners funds, despite concerns from some board members about the firm’s diversity efforts, including accusations from at least two of those members that the firm initially misled the pension on reporting about those efforts. Our colleagues at affiliate title Buyouts have further details here (registration or subscription required).

State Treasurer Stacy Garrity, who voted in favour of approving the commitments, noted at the meeting that Sentinel had no Hispanic or African-American employees and that only two of its 11 junior employees were female. Alice Mann, a partner at Sentinel Capital who focuses on human capital and who also attended the meeting, said the firm was “on a journey” in its commitment to hiring a diverse investing team and across the firm as a whole. Mann, who started her position at the end of January, said she was not involved in preparing the firm’s original answers to the pension.

Both Buyouts and our other affiliate title Private Equity International contacted Sentinel for comment and did not receive responses.

Investors’ views on DE&I are of course as nuanced as the LP community itself. Speaking to us for an interview that appears in the June issue of Private Equity International (subscription required), Daniel Winther, head of private equity and infrastructure at Sweden’s Skandia Asset Management, said that efforts to encourage the industry to report ethnic, gender and other parameters are “shooting completely in the wrong direction”.

To Winther, it’s more important to focus on creating equal opportunities rather than “managing the decimals” on the outcome side of things – something he says is counterproductive in the long run.

Even within an institution, opinions can differ. SERS’s own board was split on whether to commit more capital with Sentinel, with seven members voting yes and three members voting no. Board member senator John DiSanto, for example, made his views clear that it is not the pension’s role to tell companies how to run their businesses when it comes to issues of DE&I.

“This stuff is not definable, it’s not measurable,” DiSanto said, referring to the impact of diverse investment teams on performance. “Our fiduciary duty is to our plan holders, to get the best return that we can for them, and that’s what we should be focusing on. Assuming our investment partners are not doing anything illegal, I don’t believe we should be injecting ourselves into their business operations and how they provide a very good return for us.”

There is evidence that GPs are engaging more with DE&I issues. In a survey on the topic by Meketa Investment Group published in May, there was a near 50 percent increase year-on-year in the number of managers who responded to the consultant’s questionnaire, with 420 respondents versus 283 in the previous iteration.

SERS’s decision to commit to Sentinel despite these issues is a reminder that DE&I – an issue clearly on LPs’ minds – is not yet a deal-breaker for every investor. Only one fifth of respondents to Private Equity International’s LP Perspectives 2022 survey had refused a fund investment based on a lack of diversity at the GP-level.

Sentinel’s interaction last week with SERS is the latest example of awkward interactions between investors and PE managers over the latter’s efforts on DE&I. It likely won’t be the last.