ESG, diversity key predictors of fundraising success

According to a new report, ESG and diversity could be key predictors of successful staff retention and future fundraising.

Investec’s 2022 GP Trends report found firms with diverse staff boast increasingly stable teams and are more confident about future fundraisings compared to GPs with less diverse workforces.

The survey suggests GPs where 25-50% of staff have a minority background are more likely to retain their employees, with only a fifth considering leaving. Additionally, job satisfaction is higher in firms where GPs allocate 25-50% of the carry pot to dealmakers from a minority background.

However, only a fifth of all responding firms have appointed a partner from an ethnic minority background in the last 12 months. The figures for female partners are slightly higher, at 35%.

“The private equity industry is not as diverse as other industries and still has a way to go, but since I started my career there have been huge strides made to address that,” Inflexion partner Florencia Kassai said in the report. “LPs have wanted to see more diverse managers, GPs have responded and pushed that through their organisations. There is no single solution to making the industry more diverse, and what we want to avoid is a situation where you are promoting people above their capability or experience level. The industry has to look at all the things it can do in the round, whether that be good maternity packages and providing mentoring and coaching support, to demanding that recruitment agencies find more female and minority candidates with the right experience.”

Committed to the issue

Over half of all respondents believe ESG credentials do influence LP likelihood to commit capital to a fund.

According to the survey, 55% of PE managers who expect their next fund to be 50-100% larger than its predecessor have employed a female partner in the last year. This is opposed to 21% in firms that expect their next fund to be of similar size.

Similarly, 29% of managers expecting to raise a larger fund hired a partner from a minority background over the last 12 months, in contrast to the 17% expecting a similar closing amount.

“The weighting of ESG in LP allocation decisions is increasing steadily every year,” Klas Tikkanen, COO at Nordic Capital, said as part of the report. “PE managers in Europe, and the Nordics in particular, were early adopters of ESG processes within their firms and have benefitted from the growing focus on sustainability by investors globally.”

Finally, 62% of GPs named ESG as a significant contributing factor to their decision whether or not to invest in a poential portfolio company. Equally, they expect portfolio companies with good ESG processes to be priced at premiums of 10% or more on exit.