Unlocking Value for Private Equity Firms with DE&I
McKinsey recently came out with an article showing the significant opportunity private equity (PE) firms have to leverage DE&I efforts in order to derive significant value from their portfolio companies. Given their reach, PE firms have a unique opportunity to play a huge role in changing the face of business leadership.
It is now broadly acknowledged that diverse leadership improves financial performance - both near-term performance and long-term value creation. This comes from expanding the overall talent pool; enhancing the ability to retain the best talent; increasing decision-making effectiveness, and stimulating greater consumer empathy. In addition, consumers are increasingly making buying decisions based on a company’s diversity record. Leaning into DE&I efforts also helps improve the pool of talent willing to pursue a long-term career in private equity and helps firms appeal to LPs that have increased their own scrutiny around diversity (especially if part of a broader ESG investing focus).
PE firms have their own leadership teams to think of, but where this really has the potential to scale is in the leadership ranks and boards of their portfolio companies. When we consider that larger PE firms have between 100-200 portfolio companies under management, there’s a significant opportunity to help expedite the glacial rate of change we’ve seen over the last 20 years.
With performance deltas of 15-30% for more diverse leadership teams, which PE firms can not afford to pull this lever?
Similar to the rest of corporate America, PE firms have relatively strong gender and racial diversity in entry-level positions, but diverse representation decreases with each rung on the leadership “ladder”. And at the top, PE firms lag behind the rest of corporate America with the number of women on executive teams (20% at PE firms vs. 30% in corporate America) and even worse for BIPOC populations. It’s the leaky bucket of diversity and the leak is even bigger at PE firms.
So, where can PE firms start? Many articles that address the challenge in this industry point out the need to track diversity and the importance of building diverse teams in portfolio companies. But the hard work of actually creating that change? If it was easy, we would have made more progress in the last generation or two. Yet we have not moved the needle at the top.
What are the most impactful levers for improving diverse representation in leadership? Many companies have done a good job improving recruiting, and we see the results with more diversity amongst entry-level positions. More recently, companies have invested in DEI initiatives to build a more inclusive workplace and culture. This helps and certainly checks boxes. But to build more diverse leaders sustainably, we also have to focus on the biggest hurdles faced by diverse and under-represented people on their leadership journey.
Ceresa’s proprietary data and research serving hundreds of diverse aspiring leaders suggest these barriers fall into 5 buckets:
1. Self-Awareness and Vulnerability
Research shows self-awareness to be the number one trait most correlated with executive success. This is important for all human beings striving to improve their leadership effectiveness. Women and diverse communities receive less feedback in general, and the feedback they do receive is often less focused on their career success and more on their communications style. This makes it a steeper hill to climb to build a deeper level of self-awareness. In addition, being vulnerable and authentic is a key way to build strong trust-based relationships – yet this is inevitably harder when you perceive yourself as “an only one” or frequently experience micro-aggressions based on your race or gender. I personally recall when I was struggling to make our child-care situation work at home and considering a nanny to help with my babies. However, I didn’t feel comfortable sharing my struggles with my male colleagues because of their past alienating and offensive remarks about their “hot” nannies. Creating true psychological safety for all in the workplace is a critical topic right now, and not one to under-estimate. It enables real conversations that build self-awareness and trust.
Recommendation:
Invest in all of your team going through a program that facilitates self-reflection, feedback, and shared discussion. Existing leaders face an extra responsibility to enable true vulnerability through role-modeling brave disclosures about their own challenges, fears, or failures. This is typically easier for those who already sit in a position of power, and sets the stage for others to feel more comfortable in doing so.
2. Aspirations and Goal-Setting
Explicit goal-setting has a clear link to career progression. Yet we have seen at Ceresa that more diverse people are rarely asked, and rarely give themselves permission to consider, what they want to do with their life. “Tiara Syndrome” is used to describe a gendered tendency amongst women to believe if they put their heads down and do a good job, they will be “crowned” at the next promotion. In reality, navigating careers requires clear goals that you ask for help in achieving. No one makes it alone. But the effectiveness of mentors, sponsors, or any form of support is predicated on knowing what you want and need. When Ceresa participants start, we ask about their leadership outlooks. Despite seeing very high aspirations, more than half of our participants lack a clear vision or understanding of how to get there.
Recommendation:
Embed explicit longer-term and short-term goal setting in your annual talent cycles. Do your managers talk with their teams about their long-term goals? Is this embedded into your culture? We often see goals that are singularly focused on output and KPI achievement, and those are definitely important, but the best companies make sure their people’s career and personal goals are taken into consideration.
3. Access to Leaders
Strong self-awareness and clear goals alone are not enough. Abundant evidence and research show five times higher rates of promotions and pay raises for those who receive mentoring. Organically, mentoring disproportionately benefits white males. They receive more mentoring, from more senior leaders, with more of a focus on explicit career success factors. In a #Metoo world, we also see this situation worsening for women, with fewer men willing to spend time one on one with their female colleagues.
Recommendation:
Don’t shy away from formal mentor programs. While some do have a bad reputation, if you work on building greater self-awareness and clearer goal-setting, that can lead to much more impactful mentoring – especially if you provide matches based on the explicit needs of the individual.
4. Treating Your Human Resources as Humans First
Most leadership programs provided by employers are very focused on progress in the workplace. Yet the stark reality is that women and BIPOC populations experience a greater burden of care-giving making the challenges of showing up and rising as a leader different and even more challenging. When companies do not provide support on these topics, this disproportionately fails diverse individuals. And it sets a precedent that those topics are not part of the appropriate work dialogue... yet especially as work from home environments expand, we see the duty of care rapidly changing for employers.
Recommendation:
Consider instilling a culture of asking what support or feedback you can provide for people in making their whole life work, and incorporate this into formal structures (including ensuring any extra-curricular activities or trainings are offered at convenient times for all people) and consider what additional benefits you can provide to help alleviate some of the greater burdens faced by caregivers.
5. Shared Journeys
Research shows that when we share our goals and progress against these goals, this further enhances not only career trajectory but human happiness. These human connections also help individuals find a peer group to learn from, often building deeper cross-functional collaboration and a long-term support network. All of this helps with not just employee development and performance, but also retention.
Recommendation:
Encourage the creation of cross-functional small peer group forums alongside any formal mentoring or leadership programs – whether through Lean-In, your own structure, or a program like Ceresa.
Through our work with the private equity industry, we see a few additional, specific trends:
First, the lower levels of representation in leadership positions make it even harder for diverse individuals to see themselves as leaders in those organizations – we frequently hear this from women who want to build families as well as careers. The culture this creates also makes it harder for those individuals to voice these concerns or desires with colleagues, again making it harder for people to learn how to think about this balance. Perhaps unsurprisingly, satisfaction with health, wellness, joy, and social impact also tends to be lower amongst this specific community.
Second, with relative homogeneity amongst leadership (in background as well as identity), there is less “tolerance” for different leadership or communication styles. We always see 360 feedback focus heavily on communication style, but this is even more pronounced within PE firms. The feedback can be that the person is too direct or not direct enough… making it hard for individuals to find their authentic voice while trying to fit into a mold that has worked for the current leadership.
The diverse talent early in their PE journey need access to leaders who look like them and who’ve gone through the same challenges they’re currently facing. They need a psychologically safe space to be completely vulnerable with their struggles and hear real-life examples of how to get to the other side.
Within PE-backed companies, we also see a few unique challenges. As people rise into more senior leadership positions, they find it significantly harder to make their whole lives work – with significant concerns over the ability to be present for their children or progress toward other life goals while managing the performance of their companies and expectations of their investors. At the same time, in the 360 feedback, the amount of “whole-person” focused advice drops off significantly for people more senior in their career. So making your whole life work gets harder, but there is less support.
In addition, a common trend we observe is a real lack of delegation. Rising senior executives (e.g, those at the VP level) felt so much short-term pressure, they did not feel like they could invest in building up or coaching their teams. Longer-term, this is obviously self-perpetuating – leading to lower morale on teams and burnout at the senior level – so it’s not surprising that these leaders cannot step up into more strategic thinking, or make time for other life commitments.
No matter where you are on your journey with diversity, we would love the chance to talk with you, hear what is working, where you are struggling, and work together to find the right solutions.
Ceresa Leadership Philosophy
At Ceresa, mentorship is an integral part of our leadership development process. Providing access to mentorship and leadership support to all is one of our founding principles, critical in helping to develop diverse leadership.
