When the private equity executive Lise Fauconnier led Ardian’s investment in logistics specialist Staci in October, acquiring a majority stake, it was not just another feather in the cap for an experienced investor with an impressive record. The managing director’s success was also another example of the efficacy of gender diversity in executive teams in buyout and growth operations.
Fauconnier’s ability, and that of other female investment managers, came as no surprise to me and my colleagues at HEC. Our large-scale research reveals that gender diversity in private equity is not only about morality; it is also a contributor to successful transactions. Gender diversity produces higher returns and a lower risk of failure than all-male teams. More generally, diversity in all forms — ethnicity, nationality, gender, professional backgrounds and experience — enhances efficiency in private equity buyouts.
With unprecedented access to data, we showed that buyout teams with at least one woman outperformed all-male teams by an average 12 per cent of IRR (internal rate of return) and a remarkable 52 cents per dollar invested. Yet despite empirical proof of their pivotal role, women still occupy only 9.4 per cent of senior jobs in private equity.
This glass ceiling has thickened in the past two decades. At board level, private equity appears to be trailing by a ratio of 2:1 in gender diversity compared with the broader financial services industry. Audited performance data on deals completed between 1986 and 2015 shows a drop in the number of women leading deals in the final decade (from 5 per cent before 1995 to 1 per cent between 2006 and 2015).
As a strategy professor at HEC Paris, since 2010 I have run the Private Equity Observatory, a research programme financed by several private equity firms. This allows me to use data shared in confidence by funders in private equity.
In partnership with MVISION, my private equity research sponsors, I have investigated over the past 12 months the relationship between gender diversity and performance in the mature private equity markets of Europe and North America. My data set was 2,454 deals executed by 51 fund managers across 220 funds over 20 years. Based on these deals, the study made informed assumptions about the gender composition of investment committees using the data available to us.
The results show that committees with at least one female member outperform all-male committees across three widely recognised private equity deal performance indicators (PERACS Alpha, total value to paid in, and IRR). Gender diversity also brought down the average capital loss ratio of a fund by 8 per cent to 12 per cent. Women led buyout deals more often in biotech and IT but less in industrials, business services and technology, media and telecoms. Deals made by women also tended to have longer holding periods, which can be a sign of more fundamental transformation at the company, or an indication of deals not being sold prematurely, but held until full value creation potential has been realised.
Other research has suggested these effects, but our study is the first to prove empirically that performance of gender-balanced investment teams correlates with higher returns.
So why are private equity companies unable or unwilling to implement greater gender balance? The question arose when I presented my findings at a panel discussion at the National Arts Club in New York in June, an event featuring several senior female private equity executives.
The answers hypothetically could be at several levels: there is an underrepresentation of women graduates from business schools; of these graduates, a small proportion go into the financial industry. Furthermore, private equity is a sector with long working hours and a heightened culture of competition that are not easily compatible with family life. Finally, women may still be forced to be twice as tough and streetwise as men to make it to partner or directorship levels — another compromise to a healthy work/life balance which male counterparts appear more willing to accept.
Nevertheless, at the debate, private equity investor Sheryl Schwartz — one of Mergers & Acquisitions magazine’s “most influential women in mid-market M&A” — asked rhetorically: “With better performance and lower loss rates, why wouldn’t private equity firms put women on deal teams?”
Our conclusions seem to support her question. But there are solutions: mechanisms to make jobs more compatible with what women seek, allowing a flow of qualified women into private equity. We also believe men need to come on board in driving gender diversity: they should know it is likely that male leaders provided many of the career opportunities given to the women observed in our research.
The evidence suggests men must become involved in the debate, not as a token gesture but as a matter of financial logic. Private equity firms should find ways to implement diversity systematically at all levels of their investment structures. In this way, role models such as Fauconnier and Schwartz may multiply in the same proportions as the number of women found in firms’ key decision-making bodies.
Oliver Gottschalg is a professor of strategy and business policy at HEC Paris
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