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McKinsey Report: Diversity in Global Private Markets 2022 and Institutional Investors as Catalysts for Change
Report | Aug 23, 2023
Image: McKinsey report, State of Diversity in Global Private Markets 2022
The McKinsey report titled 'The State of Diversity in Global Private Markets 2022", presents new research that captures regional differences in diversity within private equity and discusses the role of institutional investors as catalysts for change.
Key Insights
- Scope of the report:
- The research focuses on diversity in the global private markets industry, particularly private equity (PE) firms and institutional investors (IIs).
- The study surveyed 42 PE firms and IIs globally and conducted interviews with industry leaders.
- Institutional Investors' Perspective: Chief investment officers (CIOs) of leading IIs would allocate twice as much capital https://ncfacanada.org/why-venture-capital-firms-need-more-women-partners-and-entrepreneurs/to a more gender-diverse PE firm when comparing two similar firms. More ethnically and racially diverse PE deal teams would receive 2.6 times as much capital.
- While 23% of all investing roles are held by women at PE firms globally,
- Only 12% are women at the managing director level.
- However, at diversity-leading firms, 32% of MDs are women, and 32% are ethnic and racial minorities.
See: Strategies for Addressing Canada’s Tech Talent Gap: Leveraging Micro-Credentials, Accessible Training Programs, and Diversity in Hiring
- Geographic differences exist across the pond.
- PE offices in the Americas have the highest share of women in the C-suite.
- APAC leads in women's representation in mid-level roles, and
- Europe leads slightly at entry-level investing roles.
- Even at senior levels, women and ethnic and racial minorities may not hold the same positions of power as their counterparts. PE investment committees report 9% women globally and 9% ethnic and racial minorities in Canada and the US.
- Institutional investors can be significant catalysts for change in diversity within PE, given the capital they allocate to PE firms. They are increasingly requesting diversity data from PE firms during fundraising.
Focus Areas for Institutional Investors as Catalysts for Change
1. Institutional Investors are increasingly asking for and receiving diversity data from private equity (PE) firms during their fundraising processes.
- Since PE firms raise significant capital from IIs, they are motivated to align their actions and strategies to IIs’ priorities, especially during capital raises. By requesting diversity data, IIs can influence PE firms to prioritize diversity within their teams.
2. Chief investment officers (CIOs) of leading IIs have indicated a preference to allocate more capital to PE firms with more diverse teams.
- For instance, they would allocate twice as much capital to a more gender-diverse PE firm when comparing two similar firms.
- By allocating more capital to diverse teams, IIs can incentivize PE firms to prioritize diversity. The data suggests that not only would diverse teams receive more funding, but there might also be a penalty for PE firms that lag peers on diverse talent.
See: CSA Seeking Comments on Proposed Changes to Governance and Disclosure Practices Around Diversity
3. Standardization of Diversity Metrics
- One of the challenges both IIs and PE firms face is the lack of standardized metrics for reporting diversity. This makes the reporting process labor-intensive for PE firms and difficult for IIs to compare data across multiple PE firms.
- Standardizing diversity metrics would streamline the reporting process, making it easier for PE firms to provide consistent data and for IIs to make informed allocation decisions based on that data.
4. Broadening the Scope of Diversity
- The current report primarily focused on gender and ethnic or racial diversity within PE firms. However, there's a recognition of several other categories that contribute to employee diversity.
- A broader understanding of diversity, including aspects like socioeconomic background, sexual orientation, etc., would provide a more comprehensive view of diversity within PE firms, allowing IIs to make more informed decisions.
Does It Make Sense for Institutional Investors (IIs)?
Yes, it does make sense for institutional investors to focus on these areas for several reasons:
- Diverse teams are known to bring varied perspectives, which can lead to better decision-making and risk assessment. By investing in diverse Private Equity (PE) firms, IIs can potentially mitigate investment risks.
- Many institutional investors have environmental, social, and governance (ESG) goals. Promoting diversity aligns with the social aspect of ESG, allowing IIs to meet their broader objectives.
See: McKinsey Report on Gender Diversity in Canada
- The research suggests that there might be a "diversity premium." IIs believe that diverse teams might lead to better investment outcomes, and therefore, higher returns on their investments.
- In the current socio-economic climate, there's a growing emphasis on diversity and inclusion. By promoting diversity, IIs can enhance their reputation and branding, making them more attractive to stakeholders.
In conclusion, it's not only a moral imperative but also a strategic one for institutional investors to act as catalysts for change in promoting diversity within the private equity industry. The landscape of private equity is undergoing a significant transformation, with diversity at its core. As institutional investors wield their influence, they not only champion a moral cause but also pave the way for a more inclusive, innovative, and successful future in private equity. The journey towards diversity is both a challenge and an opportunity, and with the combined efforts of all stakeholders, the industry is poised for positive change.
Participate in McKinsey's 2023 Study
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