Changing comsumer habits and a changing of the guard in the boardrooms of the world’s top grossing and growing companies are bringing about a sea change in the attitudes of private equity GPs and LPs to diversity and inclusion issues, says Liz Pfeuti…
Changing comsumer habits and a changing of the guard in the boardrooms of the world’s top grossing and growing companies are bringing about a sea change in the attitudes of private equity GPs and LPs to diversity and inclusion issues, says Liz Pfeuti…
If money makes the world go around, there is something else behind it. Commerce and industry do not stand still, nor do the people who lead or invest in them.
Ten years ago, the world’s largest companies were oil giants, retailers and mainstream technology companies, with boards, for the most part, filled with white, Ivy-league or Oxbridge-educated men.
Today, the companies leading and moving up the major world indices are different, pushed by changes in consumer habits. But since the financial crisis, start-up entrepreneurs have been empowered to take their ideas and run with them, whether they fit the traditional mould of a company director or not.
With an increasingly diverse group leading the world’s top grossing and growing companies, investors are beginning to realise that those looking to acquire and develop them need to change, too.
Diversity and inclusion, a topic that has been at the top of HR agendas for some time should, according to investors, be moving to the top of all GPs’ to-do list.
Dawid Konotey-Ahulu is the co-founder and chairman of Redington, an investment consulting firm that works with some of the UK’s largest and most sophisticated pension fund investors. He also founded Mallow Street, a social network for pension fund trustees, and is one of the leaders of the asset management industry’s #Talkaboutblack project.
From his position, he sees the investor world at “an inflection point”.
“Every chief investment officer is thinking hard about the diversity question, but the output is different at all organisations,” says Konotey-Ahulu. “Investors – at both asset managers and pension funds – are beginning to realise that you get better ideas through diversity of thought and this leads to a better outcome.”
Georgia Rankin, head of the European private equity practice at recruiter Russell Reynolds Associates, has seen the demands from investors impacting how private equity firms are building their teams.
“LPs such as pension funds are increasingly scrutinising their GPs’ diversity,” she says. “They are asking these questions in fundraising rounds, and looking at the diversity in portfolio companies, too.”
Brigid Rosati, director in business development at Georgeson, works with shareholders that make demands on public companies around their board diversity.
She has seen how shareholders believe that more diverse boards function better. Even on a very basic level, new skills such as expertise on cybersecurity, technology and corporate social responsibility are unlikely to be represented by the “usual suspects” sitting on company boards.
“Their hope is that diversity will drive improved board competency and efficiency in overseeing corporate strategy as well as creating better long-term value for the company,” said Rosati.
For privately held companies, the same holds true, with investors pushing to increase the span of directors’ skills. With a typically closer relationship between investor and board, the issue can be pressed even more urgently – but can only be represented authentically if the team doing the pressing practices what it preaches.
“It is important to have a team or company that is representative of society,” says Rankin. “Looking at consumer products, customers are 50% female. Investors need to understand their needs and desires and that is best achieved through representation, especially when they take a seat on the board to try and transform company.”
Rankin is part of the Level 20 initiative, which promotes women within private equity. It has received buy in from some of the world’s largest firms and there is a clear trajectory for those undertaking and getting on board with the programme, according to Rankin.
Already, at a junior level, one in four investment professionals are women, she says. The hope is to retain these women to senior level, but that is also the challenge.
Ray Stenton, managing partner at Manchester-based Northedge Capital, said his firm was hearing more demands from investors on the topic.
“We are working to widen our talent pool to establish a team with more diversity of thought and experience, as well as addressing the gender imbalance,” he said. Stenton said rather than being the “right thing to do”, Northedge understood the correlation between wider diversity and better investment returns.
“Our next step is to expand our horizons to our portfolio, helping them to develop their approach and share best practice,” he says.
Konotey-Ahulu advised other GPs to get on the journey, too, as many of their competitors have already started out.
“Some might still think their USP is the number of deals, or ‘bench strength’ – but they are going to find that investors no longer just think of those elements as the only right criteria,” he said. “A firm might still be winning deals, but they know better than anyone that businesses might look great from the outside, but they can suddenly not be going so well.”
Rankin has seen the industry waking up and embracing the potential of D&I.
“They do still want the best people on their teams, but their thinking is evolving around what ‘best’ means and what someone brings to the party,” she says. “The complexity of acquiring and understanding target companies’ needs may require a new toolkit.”
It seems that investors have decided that diversity is the secret sauce to long-term company success, and it is up to those leading the firms to act.
“By looking forward and embracing what diversity can bring to a business – and that their clients will be demanding – they can demonstrate they really look long term,” says Konotey-Ahulu.
