5 Minutė; -tės; -čių skaitymo 2020-11-20
Woman checking texts and emails on her smartphone

How diverse private equity partner teams affect outperformance

Autorius Sandra Krusch

EY Europe West Private Equity Leader

Passionate about people; team player, inclusive. PE client-serving. Leading by enabling others. Enjoys skiing; travel enthusiast.

5 Minutė; -tės; -čių skaitymo 2020-11-20

There are positive effects of diverse PE partner teams on PE buyout performance with gender diversity being one of the most notable aspects.

In brief
  • Diversity in gender, nationality and age drives performance.
  • Different backgrounds lead to a broader set of perspectives and better decision making.

Researchers Silke Pettkus and Prof. Schwetzler from the Center for Corporate Transactions and Private Equity at HHL Leipzig Graduate School of Management and EY have set out to investigate the impact of diverse lead partner teams on outperformance in PE.

Age doesn’t matter. Even though alternative investment (AI) and PE are among the youngsters in the financial services field, they have always been staunchly male bastions. Some three dozen years ago, these disciplines of the financial sector were founded by white men with an investment banking or consulting background. To this day, they keep attracting peers, resulting in a very homogeneous workforce.

However, there is a serious incentive to improve these structures. Recent research by EY and the Center for Corporate Transactions and Private Equity (CCTPE) at HHL Leipzig Graduate School of Management shows a number of positive effects that diverse PE lead partner teams have on the performance of PE portfolio firms. In short: a broad line-up comes with numerous benefits. Most notable among them are the positive effects of gender diversity.

According to the Preqin Impact Report 2020, the share of women in AI still hasn’t risen above the 20% threshold. And only some 12% of senior positions in PE are held by females. The percentage of women managing buyout businesses is still far from reaching the double digits. Notwithstanding these low percentages, gender equality could be seen as the success story within the field of diversity. By contrast, the figures for ethnic minorities make for very disillusioning reading, with only 2% hispanic and less than 1% black venture capital investors in the US, according to Gompers and Kovvali, 2018.

The effect of a lack of diversity on the success of the sector is a pivotal question. Would the outcome of buyouts or complex restructuring deals be more favorable if teams represented the diversity of society to a greater extent? The researchers at CCTPE have pondered over the issue, assembled data and crunched the numbers – and are now able to shed some light on these questions. Their results are based on a research paper (forthcoming in the British Journal of Management) following academic standards. The underlying empiric sample serves as a basis for further joint analyses with practical insight from EY.

The bright and dark sides of diversity

Research suggests that the “bright side” of diversity is at least partially offset by a “dark side.” There are doubtless benefits of a diverse team; different backgrounds of the individual team members lead to a broader set of perspectives, contributing to more nuanced decision making. Simultaneously, these exact same differences can lead to communication barriers and possible clashes between the individuals involved.

To discover which of these opposing aspects is dominant, the researchers introduced a novel, comprehensive diversity index specific to the PE industry. They measured diversity in PE-led partner teams by several socio-demographic and occupational factors. Gender, nationality and age are examples for the first group of diversity dimensions. Professional experience, educational background and university affiliation count among the factors of the second group. The index was then related to buyout performance, measured by the mean growth of the portfolio firm’s enterprise value during the holding period (excess growth as deviation from listed peers in relevant industries in each country).

The researchers’ starting point was a database comprised of data of 17,094 global leveraged buyouts realized between 1997 and 2015. PE sponsor, country and deal character are just some of the details contained in the database. Successively, the database was whittled down, as a number of the deals were not closed. For others, the necessary information on the team structure wasn’t available.

Leveraged buyouts under the microscope

The final sample included 241 leveraged buyouts from those 25 countries that are currently responsible for the lion’s share of the global gross domestic product. It comprises full demographic information about the 547 PE partners involved – which, in itself, offers intriguing insight into the industry.

Within this sample, women are extremely underrepresented – only 5% of lead partners are female. A closer look at the composition of rank and file in the PE industry reveals that this problem is not about to disappear any time soon. Even at junior levels, a mere 30% of PE employees are female (Preqin Impact Report 2020).

Limited scope for improvement: there are not enough women in junior positions in PE to tip the balance in the near future.
Percentage of women filling senior positions in the pe industry

Geographical lumping is another fact of life in the world of PE. The sample under investigation has a European focus and reveals that two thirds of lead partners hail from Western Europe, including the UK. A further 20% are US or Canadian citizens. The figures for Northern Europe, as well as for Southern and Eastern Europe combined, are significant enough to deserve a mention, at 7% and 5%, respectively. The combined share of the rest of the globe amounts to a mere 3%.

The distribution with regard to age brackets is more even, with 43% of partners in the bracket from 35 to 45 years, with 21% older and 36% younger than that.

Previous relevant industry experience is the exception; only 13% of partners have worked in operational roles within the same sector of the portfolio firm, 57% are financial services experts or have other non-operational experience (e.g., legal), and 30% hail from the world of pure consulting. The university degrees underline the trend; 75% of partners have completed a business related academic education.

Socio-demographic diversity supports growth

What does this set-up mean for the growth rate of the portfolio firm’s enterprise value? The analysis shows a clear advantage for lead partner teams with high socio-demographic diversity. A mix of nationalities, genders and age-groups brings in a number of different perspectives which, in turn, contributes positively to problem-solving. The downside of diversity, such as inefficiencies in communication or coordination, seems to be less detrimental to teams with high socio-demographic diversity.

By contrast, in teams with different academic and work backgrounds, the process deficiencies are outweighing the benefits of multiple perspectives. Partners with a high level of occupational diversity do not share the same “language of expertise”, resulting in a slow-down of execution speed, one key dimension of PE performance.

Below the line, in PE teams that are very diverse in both aspects, socio-demographic and occupational factors, these opposing effects neutralize one another.

Opposing effects on performance: while socio-demographic diversity is positive for performance, occupational diversity is detrimental to it.
Diversity in private equity

One significant exception to the rule

However, the researchers at EY and the CCTPE have discovered an important exception to the findings outlined above: For more complex buyout deals, the rules are different. Here, both diversity dimensions have beneficial effects on the performance. In these more challenging circumstances, the different knowledge and perspectives through diverse backgrounds, cultures and levels of expertise of a team seem to outweigh the associated transaction costs. The importance of execution speed may diminish, giving room to diverse ideas aimed at optimal problem-solving.

Different rules for complex deals: in very challenging set-ups, all aspects of diversity become drivers of outperformance.
Diversity in private equity different rules

Gender diversity might make the difference

Based on the study, a high diversity in gender, nationality and age drives buyout performance. Taking a closer look at the gender aspect, mixed lead partner teams outperform all-male teams on average. This outperformance is even more pronounced in gender diverse teams with multi-national backgrounds. When it comes to industry experience, a gender diverse team with a homogeneous professional background scores highest in the sample.

Women are highly underrepresented in PE. However, gender diversity might be the key to outperformance.
Outperformance of mixed lead partner teams

The data points to one straightforward guidance for PE firms: wherever possible, they should set up a more diverse buyout team with regard to gender, nationality and age. In addition, it is important to consider the complexity of a project to be able to leverage the full potential of diversity.

  • About the study

    The underlying academic research paper is “The more the merrier? Diversity and Private Equity Performance” by Benjamin Hammer, Silke Pettkus, Denis Schweizer and Norbert Wünsche, forthcoming in the British Journal of Management.

  • About the CCTPE

    The CCTPE is a renowned think tank for private equity buyouts at HHL Leipzig Graduate School of Management – one of the leading business schools in Europe. The think tank aims to promote high-quality research results and to provide a platform for renowned academics and industry experts. The CCTPE was established in 2017 with the support of numerous institutions, including EY; Andersch FTI; Astorius; AssetMetrix; Börsen-Zeitung (WM Group); Boston Consulting Group; CARLSQUARE; Hauck & Aufhäuser; Neuberger Berman; Nordic Capital; Palero Capital; Skadden, Arps, Slate, Meagher & Flom and ValueTrust Financial Advisors.

Santrauka

The effect of a lack of diversity on the success of the private equity sector is a pivotal question. Data shows that there are doubtless benefits of a diverse team; different demographic backgrounds of the individual team members lead to a broader set of perspectives, contributing to more nuanced decision making and better overall performance at the portfolio firm level.

Apie šį straipsnį

Autorius Sandra Krusch

EY Europe West Private Equity Leader

Passionate about people; team player, inclusive. PE client-serving. Leading by enabling others. Enjoys skiing; travel enthusiast.

Related topics Private equity
  • Facebook
  • LinkedIn
  • Twitter