As investors demand greater accountability on diversity and inclusion efforts in the asset management industry, private equity firms are under pressure to change. Women in the alternative assets sector, for example, held only 11.9% of senior roles, according to a Preqin study released in February.
As investors demand greater accountability on diversity and inclusion, private equity firms are under pressure to change.
Now, a recent initiative seeks to address that disparity – by bringing together limited partners and general partners who share a commitment to advancing diversity, equity and inclusion in the private equity industry. But how much of this reaches the middle market will be a question.
It’s called the the Diversity in Action initiative, and was recently launched by the Institutional Limited Partners Association.
Under the initiative, investors commit to advancing diversity and inclusion, both within their organizations and within the industry more broadly. Those signing on promise to take four important actions:
- Implement and communicate a diversity and inclusion strategy
- Monitor hiring and promotions by gender and race
- Align goals to recruit and retain an inclusive workforce
- Share demographic data with limited and general partners when raising capital
In addition, the initiative requires at least two additional actions from a larger list of nine that spans topics like talent management, investment management and industry engagement.
About 50 firms pledged their support of the initiative, including familiar names like KKR, the Carlyle Group and Apollo Global Management. But only 20% of those signing the initiative were middle market firms, or funds with less than $5 billion in assets under management.
Middle market firms
Middle market firms have been playing catchup. In a special report of the proprietary RSM US Middle Market Business Index published in May 2020, 53% of middle market executives surveyed by RSM in the fourth quarter of 2019 said that they had a somewhat or highly formalized focus on employee diversity and inclusion in the workplace.
Since the survey was taken, though, social unrest has put a spotlight on the issue, and we expect these numbers to grow. Research shows that there are benefits when an organization, no matter the size, emphasizes diversity and inclusion. These include:
- Support for the local community
- Reinforcing organizational values
- Improving employee morale
- Collaboration
Ultimately, executives are coming to the realization that organizations following such practices achieve superior financial results.
All Diversity in Action signatories are provided with a roadmap to better contribute to the efforts of the action committee and to encourage sharing best practices. This includes suggested practices for organizational policy and infrastructure, attracting and promoting diverse talent, building and sustaining inclusive cultures, due diligence and investment decision-making, and reporting and benchmarking. Industry leaders will also be able to contribute to current repository of resources, thus enabling collaboration across the industry.
The initiative also calls for unconscious bias training for employees, tracking gender and race statistics among portfolio companies, and assigning an executive to be accountable for diversity and inclusion.
The takeaway
Beginning in March, ILPA will publish quarterly updates and include thematic analysis of the range of specific actions that pledging firms commit to. Best practices will emerge and these themes will be instrumental in forging the path forward for middle market funds.
