Research by consulting firm McKinsey & Co suggests that companies perform best when they have women represented on their boards and in senior management. So it’s perhaps not surprising that fresh research suggests a similar phenomena in private equity.
So What? If borne out, the results mean that the private-equity industry is one big under-performer. According to data provider Preqin, women occupy just 9 percent of senior investment roles in buyout and growth equity firms around the world.A Big Caveat: Unfortunately, the fact that so few senior deal-makers are women limited the analysis. Only a relative handful of the 2,454 buyout deals studied were led by women–too few for a statistically valid investigation. So instead, Gottschalg made assumptions about the composition of investment committees (namely, that senior women deal-makers at a firm would be members) and looked at how those committees performed in blessing or vetoing deals. Appropriately, Gottschalg calls these “simulated investment committees.”
The Results: The simulated investment committees with at least one female member outperformed all-male committees across three metrics–generating 7 percent more alpha, 0.52x more TVPI and 12 percent more IRR. These are absolute differences. Said another way, where a diverse simulated investment committee delivers a gross IRR of 32 percent, a male committee delivers a gross IRR of 20 percent. Diverse simulated investment committees also exhibit lower failure rates, defined as losing money on a deal, 12 percent vs 20 percent.
Final Word: “This is real money,” said Gottschalg. “People put billions and billions to work on behalf of pension funds and endowments in private equity and this is not a rounding error. These are very very meaningful performances measures. It’s a very strong argument that…there is something to a gender-diverse investment committee that leads to better performance outcomes.” On what that something is, Gottschalg added: “The findings are in line with research that suggests that a more diverse decision-making body is better at identifying different sources of risk. And so the overall outcome of the decision-making process avoids failure, avoids losses.”