Tracking diversity, equity, and inclusion (DEI) has gained traction among private equity (PE) firms and institutional investors (IIs). This development is part of a larger societal trend. In recent years, global social movements centered on DEI have sparked reexamination in every part of society, including business. And research shows that DEI is good for business, regardless of geography.1 In the private markets industry, IIs are placing increasing importance on PE firms’ diversity metrics in making allocation decisions. The PE industry is already making steady progress on improving the diversity of its workforce.2
Thanks to a partnership with the Institutional Limited Partners Association (ILPA), a trade association focused on serving IIs, we were able to benchmark the industry’s performance on DEI data collection. The survey explored which diversity metrics IIs and PE firms gather and how they use these data to make progress on DEI goals. Specifically, we examined who collects DEI data, how the data are collected, and the cadence of this data tracking. Two hundred sixty-five private market firms participated in the survey, deployed across 2021 and 2022.
Our data reveal that two actions would benefit the industry’s progress on DEI:
Public commitment from PE firms and IIs to advance DEI goals. Our data show that organizations that have made public commitments—independently or through industry consortiums such as ILPA—demonstrate greater progress on diversity than their counterparts.
The standardization of data tracked by IIs. Standardize the demographic data IIs ask for and track from PE firms and the frequency at which it is gathered. Increasing frequency and systematizing metrics gathered will not only make it easier for PE firms to comply with the data requests but also improve the fidelity of data comparison across firms.
These two actions could improve industry performance on diversity over time.
What IIs want and what PE firms collect
We surveyed IIs about the DEI metrics they evaluate when allocating to PE firms, and we surveyed PE firms about the kinds of diversity data they track and the types of DEI actions they are pushing within their portfolio companies. Since not all recipients of the survey were signatories of Diversity in Action, ILPA’s DEI initiative, we also analyzed data from signatories and nonsignatories separately to identify any differences between the two groups
IIs focus diversity requests on investment teams
IIs—also known as limited partners—are often the most immediate external consumers of PE firms’ DEI data. They use DEI data from each firm as one of the inputs when making allocation decisions and as one proxy for the health of their investments. According to Jennifer Choi, acting CEO of ILPA, “The bottom line is that LPs [limited partners] and GPs [general partners] alike are increasingly prioritizing diversity, equity, and inclusion in their organizations and in their portfolios, and good data builds the foundation for meaningful action and engagement in this area.”
The bottom line is that LPs [limited partners] and GPs [general partners] alike are increasingly prioritizing diversity, equity, and inclusion in their organizations and in their portfolios. Jennifer Choi, acting CEO of ILPA
Based on our survey, IIs are most interested in understanding diversity at the top. Survey results show that IIs most commonly collect diversity metrics for deal teams where they allocate money, followed by gathering data on the diversity of the boards of directors of portfolio companies (Exhibit 1).
Data collection practices vary
The private markets industry does not yet have commonly accepted standards for DEI data. Data collection practices therefore vary widely among survey respondents. Some respondents collect in-depth data on an ongoing basis; others do no DEI tracking at all.
Signatories to ILPA’s DEI initiative behave differently from nonsignatories. Predictably, signatories are more likely than nonsignatories to collect data on both their own organizations and portfolio companies, with nearly all signatories collecting their own DEI metrics, while less than three-quarters of nonsignatories collected these data (Exhibit 2).
Moreover, regional differences play into data collection practices. Seventy-three percent of all respondents globally collect gender and ethnicity or race data on their employees. Yet, for instance, 75 percent of nonsignatories based in Europe collected data only on gender.3
Collection frequency and methods vary
In addition to variations in data collection practices, collection frequency, timing, and method differ as well. When it comes to the collection frequency of PE internal metrics, the majority (44 percent) collect employee diversity metrics only during the onboarding process. However, many firms—46 percent of survey respondents—are moving beyond collecting demographic data at onboarding and toward more frequent tracking.
While IIs typically capture less diversity data from their employees during onboarding than PE firms, they do collect the information with greater frequency. About 50 percent of IIs collect these data annually, 10 percent collect them quarterly, and 25 percent collect them only during employee onboarding. The remaining 15 percent collect employee data at a frequency ranging from every two years to an ongoing basis through their HR information systems (Exhibit 3).
Survey respondents also differ on how they collect DEI data. More than 60 percent of respondents in PE reported informally obtaining this information, meaning it was not systematically reported by employees at set intervals or collected during onboarding.
However, for those that systematically track the data, self-identification has become a commonly used tool for organizations that want to collect data more frequently and in more granular forms.4 About one in four PE respondents use a portal to allow for easy self-reporting. Additionally, 16 percent of PE respondents use employee engagement surveys and third parties to capture internal diversity data (Exhibit 4).
Read More at https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/tracking-diversity-equity-and-inclusion-data-in-private-markets