Kem Ihenacho is partner, Clare Scott is counsel, and Anne Mainwaring is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Ihenacho, Ms. Scott, Ms. Mainwaring, Catherine Campbell, and Jennifer Cadet.
Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.
Diversity has become a key focus for every industry in recent years, and private equity, like many other parts of the financial sector, still has significant progress to make in terms of diversity and inclusion. Private equity lags behind others in the financial services industry across a range of diversity metrics—according to a report published by EY in December 2021, just 10% of private equity roles are held by women.
Amid a drive to boost diversity across the industry, PE funds are becoming more diversity focused in Europe, as investors and regulators demand change and sponsors seek a competitive advantage through diversity strategies.
LP focus
LPs are placing greater emphasis on diversity at GP manager and portfolio company level, and are asking for more information on diversity, equity, and inclusion (DEI) metrics. According to Private Equity International’s LP Perspectives 2022 survey, one in five LPs refused to invest in a PE firm due to the lack of diversity at GP level.
As PE firms strive to make progress, diversity-focused funds are now coming to market with specific mandates to select investments based on diversity criteria. Diversity criteria may be considered at both GP and portfolio level, for example, by setting minimum requirements for diversity of key people or carry recipients, or diversity of “C-Suite Executives” in portfolio companies.
Regulatory focus
EU regulation is placing greater emphasis on DEI, demonstrating growing appetite for change. For example, the EU’s Sustainable Finance Disclosure Regulation (SFDR) regime (which depending on structure, GPs are likely to be subject to, if based in Europe or marketing into Europe) requires consideration of metrics on board gender diversity and unadjusted gender pay gap in certain circumstances, including where investments are intended to meet the definition of “sustainable investments” under SFDR.
