Want 20% Higher Returns? Do This.

Private equity and venture capital firms with better gender balance in their senior investment teams perform better — a lot better — than more homogenous ones.

Illustration by II

Illustration by II

Private equity and venture capital firms are falling far short of their own gender equity goals — and that lack of gender equity costs them dearly when it comes to performance, a new study shows.

Funds with gender-balanced senior investment teams have generated investment returns that were 10 to 20 percent higher than those with a majority of male or female leaders, according to the study released Thursday by the International Finance Corporation, a member of the World Bank Group, in conjunction with Washington, D.C.-based alternative investment firm RockCreek and investment consultant Oliver Wyman.

The study also analyzed the portfolio companies receiving funding from private equity and venture capital firms and found that companies with gender-diverse leadership teams outperformed their less-diverse counterparts by 25 percent. The report defined gender-balanced leadership teams as those composed of at least 30 percent of the opposite gender.

Shruti Chandrasekhar, head of small and medium enterprise ventures for private equity and investment funds at the IFC, said the firm teamed up with RockCreek to combine their extensive data sets on emerging market funds and with Oliver Wyman to crunch the numbers. The results were surprising, she said — particularly when it came to quantifying the outperformance.

“What we expected to see was that we would get a non-negative — having a diverse team is not worse than having an all-male team,” she said. “But what we actually found was that there was a quantifiable outperformance.” That outperformance held at the company level, she added. “For companies that receive private equity or venture capital, if that team is at least 30 percent diversified, we noticed those companies are able to achieve higher valuations over time.”


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The report’s findings were based on gender diversity and performance data from more than 700 funds and 500 portfolio companies, as well as survey responses from more than 500 fund managers and institutional investors, interviews with more than 50 investors and gender diversity experts, and case studies of more than ten private equity and venture capital funds and institutional investors that are confronting gender imbalance issues in their own work. The researchers analyzed private equity and venture capital funds in emerging markets, a group that controls some $800 billion of the $3 trillion in global private equity assets.

These firms have a long way to go when it comes to achieving gender balance in decision-making roles, the report shows. Women made up only 11 percent of senior investment professionals at private equity and venture capital firms in emerging markets, which tracks roughly with the 10 percent of women working in senior investment roles at these firms globally. Only 15 percent of senior investment teams were gender balanced, and nearly 70 percent of them were all male, according to the study.

This lack of diversity leads to what Chandrasekhar called a “second-order effect”: Only 7 percent of emerging market private equity and venture capital is invested in women-led companies. Meanwhile, female partners invested in almost twice as many female entrepreneurs as male partners.

Chandrasekhar said the performance disparity between gender-balanced teams and their less-balanced counterparts highlighted the importance of diversity of thought.

“Investment decision-making is usually done by a small group of people, and if the group is very homogenous, you’re not getting as wide a perspective in making that decision,” she said. Chandrasekhar added that personal and professional networks are of tantamount importance to deal flow, and that a more homogenous team could lead to a smaller pool of deals.

The survey also revealed a disconnect between the importance of gender diversity to investors and their willingness to ask fund managers about it. Sixty five percent of institutional investors surveyed said they consider gender diversity to be important when choosing managers, but only 25 percent of them actually ask fund managers about the gender diversity of their firms when conducting due diligence.

“For some investors, they assume that if they ask” about gender diversity, “the perception is that the return is not the most important thing,” said Afsaneh Beschloss, chief executive of RockCreek. “There are some LPs that feel there are some tradeoffs to be made. I think that’s why the data is so important.”

Interestingly, the researchers found that investment teams that skewed heavily toward either gender underperformed gender-balanced teams.

“The takeaway is not that one is better than the other, it’s that you need diversity of thought and background,” said Alifia Doriwala, a managing director and partner at RockCreek. “That balance is what outperforms.”

To address gender imbalances, the report’s authors recommended that investors start asking about gender diversity in the due diligence process and that general partners establish “a tone at the top” for improving gender diversity — including instituting family-friendly policies. For example, 25 percent of the general partners surveyed did not offer maternity leave, and more than half didn’t offer paternity leave.