Diversity & inclusion: The right questions

In the opening quarter of 2021, Sarmayacar should become the first independent Pakistani manager to close a VC fund. The firm, established by Rabeel Warraich, formerly of GIC's private equity team in London, is expected to raise $20-25 million, with commitments from family offices, high net worth individuals, and the International Finance Corporation (IFC).

It was during negotiations over the first close that IFC mentioned gender lens investing. The development finance institution (DFI) had reviewed studies suggesting that increasing female participation in Pakistan's economy could add $30 billion to GDP. And on examining Sarmayacar's deal pipeline, it recognized an opportunity to initiate change.

"When we discussed our pipeline and what makes a good founder candidate, a few good ones were led by females. They are resilient, they face more challenges, even just commuting to work," says Warraich. "Then, from a development perspective, there are almost half a million graduate women in Pakistan who are homebound. If we're going to rule out half your population, including those educated women, that is a fundamental disadvantage we are creating for ourselves."

With IFC's support, Sarmayacar increased the proportion of women-owned start-ups in its pipeline from 10% in 2018 to 42% this year, beating the target of 40%. Seven investments have been made to-date, including two led by females. The goal is for female-led companies to account for 25% of the portfolio. Sarmayacar also wants to have at least one female board member in 40% of its companies and appoint at least one woman to its investment committee or investment advisory board.

It is relatively unusual for a GP-LP dialogue to result in a specific set of gender diversity goals, but IFC found itself pushing at an open door. "Just asking those questions sparked a whole partnership with them, and now they have a formal gender commitment," says Heather Mae Kipnis, entrepreneurship lead in IFC's gender and economic inclusion group.

Momentum play

Exchanges of this kind look to set to become more frequent as diversity and inclusion gains traction with LPs. During data collection for its report on gender diversity in private equity last year, IFC found that 65% of respondent LPs considered diversity important when investing, but only 25% asked questions about it as part of manager due diligence. However, Kipnis believes the tide is now turning, with more institutional investors putting those questions to GPs.

In the past fortnight, the Institutional Limited Partners Association has thrown its weight behind the issue, launching an initiative that calls on GPs and LPs to publicly acknowledge their commitment to advance diversity, equity, and inclusion (DEI) within their organizations and more broadly. There were 46 initial signatories, ranging from AlpInvest Partners to Canada Pension Plan Investment Board (CPPIB) to KKR.

"I have seen an evolution. Allocators of capital in the US are starting to demand diversity and ask the right questions and look for diversity in who they allocate capital to," Erika Irish Brown, chief diversity officer at Goldman Sachs, told the AVCJ Women in Asian Private Equity Forum last week.

The ILPA initiative has four foundational requirements. Signatories must have a DEI statement, strategy, or policy; they must track hiring and promotion statistics by gender and race or ethnicity; they must have goals that result in more inclusive recruitment and retention practices; and they must request or supply DEI demographic data when fundraising. Other optional steps include, assigning senior-level DEI accountability, providing unconscious bias training, promoting diversity at board-level in portfolio companies, and supporting DEI research and educational efforts.

Yet the biggest challenge for managers remains knowing where to start. "There are so many nuances to gender and not a lot of data out there aside from gender diversity from a leadership standpoint. A manager can't say, ‘If half of my portfolio is invested in companies founded by women, the net IRR or my fund will increase by this amount,' or ‘If I invest in companies that have committed to increasing female representation in their supply chain, that is going to help my performance.' They want to benchmark performance but there is no fund-level benchmark for gender," Kipnis explains.

IFC's 2019 study included statistics drawn from emerging market managers that show gender-balanced funds – where females make up 30-70% of the investment team – outperform male- or female-dominated funds. But there are five main ways to look at gender diversity, of which female representation at leadership level is one. The others are female representation in the overall workforce; supply chains, specifically working with women-owned or led suppliers and distributors; backing companies that target female consumers; and the role of women in the community.

IFC and CDC Group, a development finance institution backed by the UK government, have responded to the confusion with their own guideline on gender-smart investing. Much like ILPA, the start at GP-level is having a gender strategy. Beyond that, managers are encouraged to set gender targets, promote female talent, build a respectful workplace culture, and measure their progress. Gender should also be a consideration through the downstream investment process, from origination and due diligence to portfolio management and exits.

Held to account

What the guideline doesn't do is impose standardized targets to qualify as a gender-smart investor. This already exists through initiatives like the 2X Challenge, which lays out specific criteria in terms of share of women at ownership, leadership, and general employment levels. Rather, what IFC and CDC want to see is an acknowledgment of the gender gap and a willingness to do something about it. Targets may emanate from that discussion, as was the case with Sarmayacar.

Private equity firms across the size spectrum are already starting to hold themselves to account in terms of female representation within their organizations. For example, women now comprise 20% of the global investment team at CVC Capital Partners, up from 7% three years ago – an achievement made possible through the introduction of targets. This approach was controversial when first discussed, given a wariness among female employees about being perceived as diversity hires.

"Targets are not the be-all and end-all, but they have worked for us and because of that we have managed to move the needle," Denise Mak, a managing director at CVC, told the forum. "The ability to hire women varies from country to country. When we set the targets, people said it would be impossible given it is so hard to find women in places like Japan and Korea who want to enter private equity. But because we stuck to those targets, we have recruited investment professionals in countries where we thought it would be challenging to hire the right talent."

There is an emphasis on apprenticeship, hiring younger female professionals and bringing them through the system, partly because senior lateral hires are challenging. Australia-based Adamantem Capital has set an aggressive target of having 40% female representation across the firm by 2024, including at the leadership level. At present, all six managing directors are male, but three out of four directors in investment and operations and three out of six associate directors are women.

"We were going down a path of starting with a long list and encouraging recruiters to give us a more balanced list. We had two male candidates [for associate director], which would have given us one out of six women. Bake that into your starting point you can never recover from it," Rob Koczkar, a managing director at Adamantem, told the forum. "We said we have to be intentional about this, so we shut down the process, only looked for female candidates and found three great ones."

Structure and process

Koczkar maintains that private equity firms will achieve little in terms of diversity without the necessary ambition, infrastructure, and processes. On the recruitment side, this includes doing outreach in a wider variety of places and doing more systematic testing and interview training to minimize unconscious bias. Even job description language plays a role: the IFC and CDC guide notes that one VC firm advertised for a "coding ninja" and received only male applicants.

Retention spans a wide range of measures, from creating a workplace culture with which people are comfortable to offering greater flexibility at different stages of lives and careers – in areas such as maternity and paternity leave – to providing structured career guidance, whether that is through mentor and sponsor programs or general networking and engagement initiatives. An emerging theme is flexibility in job design. Given the shift to virtual communications during COVID-19, there is a recognition that business can be conducted without everyone in the same place at the same time.

IFC's Kipnis sees gender diversity within a private equity firm as the starting point for a broader discussion on diversity and inclusion throughout the portfolio and the communities in which portfolio companies operate. Addressing perceptions that this might restrict opportunities and add cost rather than drive performance is likely to remain a key area of focus.

For Sarmayacar, recruiting women with a view to incorporating different mindsets into investment decision-making is perhaps the most challenging of its four targets, given the shortage of suitable talent in Pakistan. However, Warraich observes that achieving this can have a powerful knock-on effect. "Female team members bring their own networks and that is one of the better ways to identify talented people who are not already in the ecosystem or who are only considering joining the workplace," he says.

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• Topics
• GPs
• ESG
• Adamantem Capital
• CVC Capital Partners
• IFC
• Goldman Sachs
• diversity & inclusion (D&I)