Diversity Efforts at Private Equity Firms Have a Long Way to Go

More institutional investors have been paying attention to the social aspect of environmental, social, and governance (ESG) investing this past year than they historically have, especially when it comes to pushing for greater diversity, equity, and inclusion (DE&I).

But those calls come with their own set of challenges that investors are working to address, particularly at private equity (PE) firms, which are under less scrutiny and are less transparent than public companies.

Last year, women made up one-fifth of senior leadership in private equity firms, compared with 30% in public companies, according to consulting firm McKinsey and Company. When it comes to racial diversity, just 1% to 2% of private equity firms were made up of Black managers, trailing behind the ethnic and racial composition of the larger US population.

There has been an uptick in DE&I efforts at private equity firms this past year, according to the report earlier this month from McKinsey and Company, but consultants say more progress can be made.

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“Many PE firms have made great strides in the past year on diversity, equity, and inclusion, and I think as an industry there’s still more that can be done,” said Alexandra Nee, partner at McKinsey’s Private Equity & Principal Investors Practice. She leads the consulting firm’s diversity and inclusion work for investor clients and is one of the co-authors of the report.

Challenges around diversity disclosures make measuring progress difficult. While increasing diversity at private equity firms and their portfolio companies has been linked to improving returns, experts are still working to nail down standard definitions for diversity.

“At what level of granularity is it helpful to know the detailed racial and ethnic diversity breakdown within a team, particularly across multiple geographies? And at what point are you starting to carve those slices so thin that you don’t really have meaningful insight?” said Jennifer Choi, managing director at the Institutional Limited Partners Association (ILPA). She’s leading the diversity, equity and inclusion initiative at the trade group.

Standards for diversity can change based on region. While racial and ethnic identity might be the most material factors in the US, elsewhere abroad, religious minority groups could be more significant.

Access to disclosures is another challenge: Restrictions on what employers can disclose about their employees vary between the US and other countries. For example, Europe typically has more robust restrictions to protect the privacy of its citizens. The size of firms also matters: In the US, many portfolio companies are not large enough to be required to fill out self-identification forms for the US Equal Employment Opportunity Commission (EEOC).

There is also a thorny set of ethical considerations. Requiring employees to self-identify can help firms document progress toward greater diversity, but it can also endanger workers. Trustees or employees who are LGBTQ+, for example, should not be required to disclose information they have yet to share with their family or loved ones.

Seeking answers to the legal, ethical, and political considerations is still in its early days, experts say, but it will be helpful as more investors work diversity into their workplace and investment. According to an NEPC survey, 70% of endowments and foundations are prioritizing the diversity gap this year.

Other notable allocators have been helping firms move in that direction. Earlier this year, Raytheon Technologies’ Robin Diamonte said her investment team will start a diverse manager program to pressure firms to form inclusive teams. Yale’s David Swensen similarly wrote to the endowment’s managers saying the same last year.

Here are some best practices McKinsey’s consultants recommend for private equity firms to increase the number of underrepresented groups:

Public Commitments: Investors can start communicating their commitment to DE&I to the public and to stakeholders, such as by hiring internal committees or chief diversity officers. They can also make their policies accessible and viewable on their websites.
Conduct Evaluations of Targets: Private equity firms can incorporate diversity assessments into their due diligence of their firms, while also eventually integrating it into their 100-day value creation plan.
Company Performance: Leadership can evaluate the performance of their firms on diversity and inclusion, and even link compensation to improvement of certain metrics.

Consulting Firms Ask Asset Managers to Disclose Diversity Data

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Tags: Asset, Asset Management, Diversity, environmental social and governance investing, ESG, Investment, justice, Management, race, racial equality, racism, social

The head of a financial firm has been indicted for allegedly leading a scheme that involved using insider information and media connections to reap a profit.

Jason Peltz, a principal of the Peltz Financial Firm and a co-founder of a mobile app startup, has been charged with securities fraud, money laundering, tax evasion, and related conspiracy charges.

According to a 10-count indictment, over the course of five years Peltz allegedly developed relationships with sources at publicly traded companies and profited from trading on insider information those sources provided. He also allegedly cultivated relationships with business journalists who would write articles based on his insider information, which moved the stocks involved.

For example, one of Peltz’s unnamed co-conspirators was on the board of directors of chemicals company Ferro Corporation and tipped off Peltz about a bid to take over the company that hadn’t been made public. Peltz then allegedly bought shares in the company and did so through the accounts of unnamed co-conspirators to avoid detection. He then fed that information to a business reporter with whom he had fostered a relationship, who wrote about the takeover bid, which sent the company’s shares higher.

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The indictment alleges that as a result of his trading activity, Peltz received “large payments” from co-conspirators, as well as other benefits, and that he received payment in corporate and nominee bank and credit card accounts to hide the income from the IRS. At the same time, Peltz allegedly falsely swore under penalty of perjury to the IRS that he had been unemployed since December 2015 and had no income. As a result, he has been charged with attempting to evade payment of approximately $1 million in outstanding income tax liabilities, penalties, and interest.

“While most Americans dream of winning the lottery or finding a stock before it takes off, Peltz rigged the system for his personal gain, creating fortune for himself at the expense of others,” IRS Special Agent-in-Charge Jonathan Larsen said in a statement. “Peltz stands accused of a multitude of crimes that go far beyond his initial investments, extending to tax crimes and lying.”

Peltz was arrested on a complaint in December and will be arraigned on the indictment at a later date. If convicted of securities fraud, he faces up to 25 years in prison.