Diversity becomes key metric in fundraising

Early data from McKinsey & Company suggests an LP preference to invest in funds boasting increasingly diverse investment teams.

The firm’s, The state of diversity in global private equity markets: 2022, research stated this to be the case even if it would entail allocating capital to a firm with comparatively poorer historical performance.

McKinsey conducted an experiment in which LPs with AuM ranging from $20bn to $460bn were asked to allocate $100m between two hypothetical PE funds.

Both funds had identical metrics except one had an increasingly diverse investment team. On average, LPs would allocate twice as much capital to the deal team with more gender diversity and 2.6 times as much to the more ethnically and racially diverse team.

In addition, the report suggested a penalty for less diverse firms. 10% of LPs stated they would not allocate any capital to the less diverse team if historical performance was identical.

Even more so, when asked to choose between a familiar fund and an unknown team with historically identical performance but higher diversity, respondents allocated 1.3 times as much capital to the unfamiliar fund with more gender diversity and 1.6 times more to teams with more ethnic and racial diversity.

Finally, in a scenario where the increasingly gender diverse team’s historic performance was poor, 40% of LPs still allocated more capital to this firm despite the history of lower returns.

This percentage is even higher for ethnic and racially diverse but less well performing funds with 50%.

Ramped up reporting

In response to the survey, PE firms confirmed increased sharing of DEI data with their LPs, both in quantity and variety.

Will Goodwin, head of direct investments at New Zealand SuperFund said as part of the report: “When we look to allocate, we ask PE funds for statistics on DEI, such as gender pay gap and representation. In our opinion, programs like parental leave are just good hygiene and table stakes these days.”

Correspondingly, McKinsey’s survey stated a jump in DEI data provided by PE. In 2018-19, 35% of firms supplied their investors with relevant information whereas the numbers for 2020-21 are 52%.

The report cited a lack of standardised metrics as the biggest challenge. GPs submit lengthy and often allocator specific forms requesting varying types of data. LPs on the other hand receive a large volume of data, including a mix of facts, metrics and narrative.