Sector News

How private equity can catch up on diversity

June 13, 2021
Diversity & Inclusion

Collectively, private-equity-owned firms make up a powerful economic force. In the US, they generate about 5% of GDP and in 2019 employed almost 9 million people. So in the push for business to increase diversity, equity, and inclusion (DEI), these firms could make a big difference. Yet PE-owned companies are behind their publicly traded counterparts in taking action. This needs to change.

PE-backed companies certainly have a significant opportunity to lead in diversity and inclusion. The nature of PE portfolio companies—their ownership structure, focus on near-term action, and smaller size, all of which allow them to be more nimble—could prove a big advantage in accelerating change.

In fact, when these firms do implement DEI programs, they have an even more positive impact on all employees than in publicly traded companies. For example, BCG analysis found that at PE-owned firms, about two times as many white men reported personal benefit from diversity initiatives than at publicly traded companies.

Given the diversity dividends—from increased resilience to enhanced innovation—as well as the risks of inaction, such as reputational damage and an inability to retain top talent, PE firms need to lead the way.

Even in normal times, PE portfolio companies would have powerful reasons to pay more attention to diversity and inclusion. An abundance of research has confirmed that diverse teams increase companies’ resilience and agility. And, as BCG has found, diversity in leadership teams boosts companies’ ability to innovate and leads to tangible improvements in their financial performance.

But these are not normal times. The pandemic has disproportionately affected communities of color. Black employees have been laid off at higher rates and rehired at lower rates than their white counterparts, reducing diversity in the workforce—as happened during the Great Recession. In the shift to remote work and learning, women have shouldered more of the burden of caregiving and home responsibilities than men, driving female employees to leave the workforce at higher rates than their male counterparts.

Meanwhile, following the deadly spa shootings in Atlanta, anti-Asian racism—which has been growing at an alarming rate in recent years—has emerged as an issue that must be urgently addressed.

And the US is not alone in needing to address injustice. In India, for example, the caste system continues to perpetuate social and economic inequality in much the same way as race does in the US. These caste-based discriminatory attitudes persist outside India and have been found in tech companies in the US. Similar problems are associated with China’s treatment of its African migrant community and Europe’s treatment of immigrant workers, who are often among the most vulnerable in the workforce and face challenges ranging from discrimination to language and institutional barriers. PE firms and their portfolio companies can play a role in preventing and reversing these inequities, fostering truly inclusive work environments, and standing out as employers of choice.

This environment has created a need for companies in every sector to take more drastic steps to increase diversity and inclusion internally, to act as a catalyst for change, and to lead in the movement to achieve equity in the workforce.

Over the past year, public announcements from large companies denouncing racism and promising to do better have, for example, been followed by commitments to racial equity of $66 billion. This suggests that when the corporate sector decides to move, it can do so at scale. So the question for PE firm leadership should be: When it comes to diversity, equity, and inclusion, how fast can the sector move the needle?

From a recent BCG survey of more than 4,000 employees in US-based firms, key findings emerge that illustrate why the PE sector has more work to do than others in addressing DEI in their organizations.

First, many firms are starting from a lower base. Compared with publicly traded companies, PE-backed firms have fewer programs, initiatives, and activities in place to promote DEI. (See Exhibit 1.) In our research, employees pointed to gaps in gender, race or ethnicity, and LGBTQ programming in areas such as mental health and wellness, flexible working, antidiscrimination initiatives, paid maternity leave, and clear criteria for performance reviews. READ MORE

By Lorenna Buck, Kanchan Samtani, Sara Kuller, Vinay Shandal, and Russell Kellner


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