Private-equity investment committees with women make better calls
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.
Speaking in late June at the National Arts Club in New York City, Oliver Gottschalg, professor at HEC Paris, presented research from his business school and from placement agent MVision suggesting that deals approved by diverse investment committees at buyout firms–those with at least one woman member–significantly outperform those approved by all-male investment committees.
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.”