How private equity can catalyze diversity, equity, and inclusion in the workplace
Business leaders hear a lot about disruption. But 2020 redefined the term. By March, the novel coronavirus had completely changed ways of life and work for billions of people. In May, the death of George Floyd produced an equally seismic shift in cultural awareness of systemic racism and set in motion urgent calls for racial equity—globally. And today, second and third waves of COVID-19 cases are tearing through many countries, exacerbating socioeconomic, gender, and racial inequities.
This article discusses how—in the current moment of upheaval—private equity (PE) has the ability and imperative to improve diversity, equity, and inclusion (DE&I) in the workplace; and in so doing, provide additional levers for financial outperformance. Our long-running research on diversity across industries shows that companies with greater diversity in leadership ranks are more likely than those with less diverse leadership to perform better than industry average on margin growth. Applying this analysis to PE suggests an additional lever for value creation within firms’ portfolios. Improving DE&I will not only provide an additional opportunity for financial outperformance, but DE&I commitments may also help firms raise capital.
By focusing on DE&I, the PE industry can create more equitable and inclusive places to work, attract better talent, redefine corporate culture, and set a standard for businesses everywhere.
The opportunity for PE
While the Fortune Global 500 comes first to mind when thinking about the corporate leaders of the economy, PE firms and their portfolio companies have an outsize ability to influence the status quo of the business community. Globally, about 10,000 PE firms have more than $3.9 trillion in assets under management (AUM).1 In North America alone, about 4,700 firms own more than 18,800 companies.2 With that kind of influence, if PE firms were to continue to reduce gender and racial inequalities across the companies they control, they could change the face of business.
McKinsey and LeanIn.org’s new report, Women in the Workplace 2020, confirms that PE lags corporate America on gender and diversity in senior ranks. Our analysis presents overall trends and averages for the industry, and we fully recognize that some PE firms have made advancements on DE&I. On the whole, gender and racial diversity at PE firms are stronger in entry-level positions than at the top (exhibit). On average at the start of 2020, about 20 percent of senior leaders at PE firms (managing-director level) were women while the share of women on executive teams in the rest of corporate America was about 30 percent.3 PE also trails on ethnic diversity. In 2020, investment deal teams are about 1 to 2 percent4 Black in the United States, with other people of color comprising the remaining 11 to 12 percent of diversity at the managing-director level.5 Public companies do better, with approximately 13 percent Black and Latinx executives.6 But that’s still far below the US demographic composition (about 30 percent Black and Latinx in 2019) and also lags behind the ethnic-minority population that holds a graduate degree (about 23 percent of the total workforce with relevant graduate degrees in 2019). PE portfolio companies’ management teams and boards of directors represent a further area of opportunity.
ABOUT THE AUTHOR(S)
David Baboolall is an associate partner in McKinsey’s New York office, Alexandra Nee is a partner in the Washington, DC, office, and Lareina Yee is a senior partner in the San Francisco office.