Our new report The state of diversity in global Private Markets: 2022, builds on prior McKinsey research on diversity in the workplace to explore diversity in the global private markets industry, with a focus on private equity (PE) firms and institutional investors (IIs). We surveyed 42 PE firms and IIs around the world and conducted interviews with several industry leaders to supplement the data we received back from these firms. Participating PE firms directly employ more than 60,000 people globally.
This report provides insights into three areas for the industry: a view of IIs’ evaluation of diversity on investing deal teams today; II’s preference toward more diverse deal teams when allocating capital to PE firms; and today’s baseline of diversity for PE investing teams in terms of gender diversity for the Americas, Asia–Pacific (APAC), and Europe, and ethnic and racial diversity for the United States and Canada.
Key findings include:
- Chief investment officers (CIOs) of leading IIs said they would allocate twice as much capital to the more gender diverse PE firm if choosing between two otherwise comparable firms. More ethnically and racially diverse PE deal teams would receive 2.6 times as much capital.
- While 23 percent of all investing roles are held by women at PE firms globally, by the managing director level, only 12 percent are women.
- PE firms’ employee diversity varies widely. At diversity leaders, 32 percent of MDs are women and 32 percent of MDs are ethnic and racial minorities. Diversity laggards have no women and 2 percent ethnic and racial minorities at the MD level.
- Geographic differences are also notable. PE offices in the Americas have the highest share of women in the C-suite and possibly the fewest obstacles to advancement for women; APAC leads the regions in investing women’s representation in the middle of the corporate ladder; and Europe leads slightly at entry-level investing roles.
- Even when they make it to senior investing ranks, women and ethnic and racial minorities may still not hold the same position of power as their counterparts. PE investment committees (ICs) report 9 percent women globally and 9 percent ethnic and racial minorities in Canada and the United States—three to eight percentage points lower than their share of investing MD roles.
Given data collection limitations, this report remained largely focused on gender and ethnic or racial diversity within PE firms. We recognize there are several other categories that contribute to the diversity of employees. Future reports hope to broaden the categories examined, as well as expand to include PE firm Portfolio Companies, among other segments within private markets. The inaugural survey findings highlight the importance to IIs of having diverse talent in PE and the progress the PE industry has made over the course of 2021 (for more, see sidebar “Institutional investors in the private market ecosystem”). It also provides clear areas of focus as the industry continues to prioritize diversity, equity, and inclusion.
Institutional investors as catalysts for change
As key players in private markets, given the amount of capital IIs allocate annually to PE firms, IIs could be real catalysts for change on topics like diversity of talent in PE—if they decide this matters (for more on IIs, see sidebar “Institutional investors in the private market ecosystem”).
Based on our study, it seems they do. IIs are increasingly asking for and receiving diversity data from PE firms seeking to raise funds. Moreover, once a PE firm begins to provide diversity data as part of fundraising, the firm is likely to continue providing diversity data for subsequent funds’ capital raises. The director of environmental, social, and governance (ESG) of a US-headquartered PE firm said, “We used to get a lot more requests on emissions and environmental metrics than on diversity. But there has been an uptick in DE&I requests, and we share what we are doing, and talk about the initiatives we have in place.”
The main challenge for both the IIs and PE firms is a lack of standardized metrics, which makes the reporting process unwieldy and labor-intensive for PE firms. As the head of DE&I at a midsize US PE firm said, “I am a big proponent of the need to streamline and consolidate what we are asked to report. It is hard for organizations like ours to respond to so many requests for different data in different forms.”
Meanwhile, IIs are left to wade through a mix of data from multiple PE firms that is difficult to compare and therefore often not able to be used in allocation decision making.
The consensus among IIs that participated in our survey is that the state of diversity in PE today is poor. IIs believe that PE firms have significant opportunity to improve the representation of underrepresented groups on their investing teams, specifically on the dimensions of gender, ethnicity and race, socioeconomic background, and sexual orientation (Exhibit 1).
IIs signaled that PE firms could do more to diversify their ICs and the management teams at the helm of portfolio companies where they hold majority ownership (Exhibit 2).
Standardizing diversity metrics will take time. However, it is clear that IIs are increasingly considering PE investing teams’ diversity in capital allocation decisions. Will Goodwin, Head of Direct Investments at New Zealand super fund said, “When we look to allocate, we ask PE funds for statistics on DE&I, such as gender pay gap and representation. In our opinion, programs, like parental leave, are just good hygiene and table stakes these days.”
While the sample size of IIs was small, our data suggests that the diversity premium can be significant in some scenarios. Ten chief investment officers representing IIs with assets under management (AUM) ranging from $20 billion to $460 billion were asked to allocate a fixed amount of capital between two hypothetical PE funds. When two hypothetical PE firms had identical metrics except for the investing team’s diversity, on average, IIs would allocate twice as much capital to the deal team with more gender diversity and 2.6 times as much to the team with more ethnic and racial diversity. Not only would the more diverse deal team receive more money, all else equal, the data suggested there may be a penalty for PE firms that lag peers on diverse talent: one II reported that they would not allocate any funding to the less diverse PE fund when the alternate funds’ historical performance was the same.
Surprisingly, in a scenario where the diversity leader lagged on historic performance rate, 40 percent of IIs still allocated more capital to the PE firm with greater gender diversity, in spite of its lower historic returns; 50 percent of IIs allocated more to the firm with lower historic returns but higher ethnic and racial diversity. Given the challenges of gathering data and comparing apples-to-apples metrics from all firms, it is too soon to quantify the extent to which this is occurring today in IIs’ actual allocating. However, responses from surveyed IIs suggest that diversity does matter to these firms, and a willingness to allocate accordingly exists if the comparative diversity data and historic fund performance is provided by PE firms.
Gender diversity in global private equity
Globally, PE firms have almost achieved gender parity in entry-level roles. As of year-end 2021, 48 percent of all entry-level roles in PE globally are filled by women (for more on job levels, see sidebar “Job levels in private equity”). However, disaggregating this figure into investing and non-investing employees reveals only 34 percent of entry-level investing roles are held by women, compared to 57 percent in non-investing entry-level roles (Exhibit 3).
Women in PE continue to experience obstacles to their career advancement. The share of minorities (on the dimensions of gender, ethnicity/race, or an intersection) within PE Investing teams often declines with seniority. One consequential result is that even senior women struggle to break into “the room where it happens” in PE: today, women make up only 9 percent of IC members despite comprising about 12 percent of managing director-level investment staff (L2) and 14 percent of C-suite roles (L1) (Exhibit 4). (For more on the role of ICs, see sidebar “The role of investment committees in the private equity industry.”)
The fact that women’s representation on ICs is lower than their presence in these senior ranks (ie, L1 and L2) may reveal an unspoken cultural dynamic in which women are still not in the same positions of power as 91 percent of their male counterparts, even at the MD or C-suite levels.
Globally, gender diversity in investing, particularly at the senior levels of PE firms, has a ways to go. Yet even today there is a significant spread among PE firms that lead on gender diversity and those that trail. When looking at the MD level (L2), the top 10 percent of PE firms on gender diversity average 32 percent investing women MDs, while the bottom 10 percent of firms in 2021 had zero investing women MDs. What’s more, women’s representation at the top seems to impact gender diversity throughout the organization: PE firms that lead on percent of women MDs also had significantly higher shares of total investing women versus the industry as a whole—a difference of 10 percentage points higher compared to the industry average of 23 percent (Exhibit 5).
Regional differences in gender diversity
The dynamics of the PE industry as a whole may affect the number of women in investing. However, regional variations also exist (Exhibit 6).
These regional differences impact different levels within the PE hierarchy.
PE offices in the Americas have low share of women in entry- and associate-level investing roles
PE offices in the Americas have the highest share of women in the C-suite and possibly the least obstacles to female advancement, with the smallest drop-off in share of women from associate (L5) to MD (L2); APAC leads the regions in women’s representation in the middle of the corporate ladder (L5 and L4); and Europe leads slightly at entry-level investing roles (L6).
Offices in the Americas boast the highest share of women in top-of-the-house roles: the share of women in the equivalent of the C-suite is 15 percent. Moreover, of the regions, offices in the Americas have the smallest drop today (12 percentage points) between the share of women in Investing at the associate level (L5, at 25 percent) and the MD level (L2, at 13 percent). However, the region also ties with APAC for lowest share of women at the entry level (L6) and Europe for lowest share at post-MBA associate (L5) level. While American PE does comparatively well with retention and promotion of Investing women, this small base of women entering the profession may constrain progress in the ability to advance a greater share of women to MD over time.
APAC offices have the highest share of women at the mid-level
APAC leads the regions in share of women investors at post-MBA associate (L5) and VP (L4) ranks. Representation for women at the associate level (L5) in APAC offices is 31 percent, five percentage points higher than the global benchmark; and representation for women at the VP level (L4) is 40 percent, 11 percentage points higher than the global benchmark. However, 2021 data shows a “broken rung” in the career progression for women in APAC offices, as the share of women plunges by more than 30 percentage points in the step up from VP (L4) to principal (L3); that is a 4.2x drop in the percentage of women advancing to principal (L3) in APAC offices. This broken rung for women from VP to principal was made more severe by a promotion gap between women and men (2 percent women vs 20 percent men from the available pool promoted) in 2021 and attrition of women at the L3 level in APAC.
European offices have the highest share of women at entry-level Investing
Europe leads the regions, though marginally, in women entering in entry-level Investing jobs, with 35 percent. However, women in Europe at the MD (L2) level have the lowest representation—7 percent—compared to all other regions and the steepest decline from post-MBA associate level, with a 17-percentage point drop from L5 to L2. Given more than a third of entry-level investing staff are women, European PE offices have a real opportunity to improve their gender diversity at the higher ranks by evaluating sponsorship throughout the funnel and promotion rates of women out of the entry-level Investing role. However, there are positive signs. In 2021, Europe has the smallest gap compared to other regions between promotion rates for men and women at the mid-level to senior ranks. Even though promotions still favor men, in Europe, the difference in promotion rates between men and women into VP and principal is less than four percentage points.
Successes and challenges for ethnic and racial minorities echo those facing women
Based on data from PE firms’ US and Canadian offices, like women, ethnic and racial minorities only make up 9 percent of IC members even though they make up almost 17 percent of Investing MDs (L2) (Exhibit 7).
White or Caucasian (hereafter "White") professionals remain the largest group in Investing roles in Canada and the United States. They hold 70 percent of all investing jobs, with White men being more than eight times as likely as White women to be MD (L2).
People of Asian descent (hereafter “Asian professionals”) are the largest racial minority group in PE Investing roles. They hold 28 percent of these Investing roles at the associate level. However, the share of Asian investing professionals declines to 12 percent at the MD level. Asians’ share of investing roles remains around or above 22 percent until it drops seven percentage points from the VP (L4) into the principal level (L3)—and even further thereafter to 12 percent of MDs and 5 percent at the C-suite level. It also should be noted that Asians are the only ethnic and racial minority whose share of roles declines substantially from L2 to L1—as White, Black, and Hispanic/Latino/Mestizo (hereafter “Hispanic”) representation increases or remains relatively constant from the MD to C-suite levels.
On the surface, Black and Hispanic professionals have similarly low representation across all levels of PE investing, starting at 4 to 7 percent of the entry and post-MBA associate levels. Both groups also lose roughly three to four percentage points from post-MBA to MD levels (L5 to L2). With 3 percent Hispanic and 1 percent Black principals (L3), PE lacks Hispanic or Black role models in the leadership ranks for more junior professionals. One chief human resources officer (CHRO) commented, “If I were a Black person looking at PE, I don’t think I would see a lot of people who look like me, and I don’t know if I would want to work there.” Despite the low numbers of Hispanic and Black principals, each group retains the small share through the top leadership ranks, with 3 percent and 1 percent of leaders, respectively, in MD and C-suite roles. However, looking more closely at the trends, there are some differences in the Black and Hispanic experience in PE.
Black professionals comprise 7 percent of entry-level Investing roles, close to double the share of Hispanic professionals. This number drops sharply to 4 percent for the associate (L5) class in the US and Canadian PE offices. Black gender composition seems to mimic the overall PE Investing gender story only at the post MBA and VP levels, where Black women are just under a third of all Black Investing professionals. As of the end of 2021, only 1 percent of all PE MDs (L2) in these offices were Black, significantly lacking representation from Black women. That share of Black women does increase slightly in the C-suite—though Black representation (men and women) is still only a little over 1 percent of all US and Canadian reporting firms.
The Hispanic experience in PE Investing also begins with low representation in entry-level investing roles, at 4 percent. However, unlike Black professionals, this number grows to 7 percent at the post-MBA associate (L5) rank. Thereafter, there is more Hispanic talent compared to Black talent at senior levels of PE firms, with 2.5 times and 3.9 times as many Hispanic principals and MDs, respectively. And yet, despite comprising 3 percent of MD and C-suite roles, Hispanic representation on ICs was less than 1 percent. The gender imbalance for Hispanic professionals in PE Investing is larger than it is for Black professionals: Hispanic women only comprise about 16 percent of Hispanic professionals from post-MBA to principal (L5 to L3), dropping by nine percentage points to 7 percent of all Hispanic MDs. While it is clear that PE firms could work on attracting Hispanic and Black professionals, the data shows there is the most room to improve in attracting post-MBA Hispanic women, in particular; firms are also falling short in retention and promotion of Black and Hispanic women at the principal and MD levels.
However, this analysis speaks to the industry averages on ethnicity and race in Canada and the United States. Of course, there is a spectrum of PE firms, with the top firms close to doubling the industry average share of ethnic and racial minorities at the MD level, with 32 percent, while more than 98 percent of MDs at the least diverse firms are White/Caucasian. As we saw with gender, diversity at the top does have an impact on the ability to retain diverse talent throughout the deal team (Exhibit 8).
While the industry average was 30 percent people from ethnic and racial minorities, industry laggards on MD-level ethnic and racial diversity were, on average, eight percentage points below industry average, at 22 percent ethnic and racial minorities across their entire investing team.
The path forward
Our findings suggest a few critical areas for leaders who want to make progress toward diversifying the industry:
- Evaluate IC diversity. PE firms should take a critical lens to the diversity of their ICs to understand if and why they are not more reflective of the makeup of their C-Suite and managing directors.
Consider region-specific obstacles to diversity:
- Offices in the Americas could strive for gender parity in hiring and attract more Black and Hispanic talent for post-MBA investing positions. PE firms may need to take a critical look at possible causes, such as barriers to entry or an unattractive culture, that results in low levels of representation of Black and Hispanic professionals even at entry levels of firms’ deal teams. For the current talent pool, firms could continue to improve promotion parity of women, Asian professionals, and Hispanics professionals into VP, principal, and MD roles.
- APAC offices can mend the broken rung from VP to principal by evaluating barriers to apprenticeship, sponsorship, and promotion of women, as well as by working to reduce MD and principal female attrition.
- European offices may reduce the loss of women from L5 to L2 and leverage the breadth of their women colleagues at L6, by striving for promotion parity for that first step up from entry level to associate level, as well as in external hiring for mid-tenure levels (L5 to L3). Finally, examining the office culture with an eye towards potentially improving retention of Investing women.
- Gather more intersectional diversity data. PE firms’ CHROs and Heads of DEI should push to improve the granularity of the data collected around the world, where possible, and devise solutions with these intersectional groups in mind.
- IIs can use standardized—and simplified—diversity metrics to evaluate PE funds. This will likely require collaboration among IIs. Furthermore, if not already asking, IIs should consistently require diversity metrics from all PE firms that approach them during fundraising.
Jerilyn Castillo McAniff, Head of D&I at Oaktree Capital Management, L.P., a global investment manager specializing in alternative investments, said, “What we need are consistent metrics and industry benchmarks so that firms can track representation and progress. Without these tools, we all operate in a vacuum. We can all do our part by participating in relevant industry studies and benchmarks, which gather data, track trends, and highlight key themes. Making progress will be a collective effort.”
Increasing the diversity of PE Investing teams takes time. While there are no quick fixes, the value to be gained by taking effective action could motivate sustained focus on the goal. Creating an equitable and inclusive culture will be the key to retaining a diverse workforce over time. The Head of HR for a European firm shared, “By humanizing the culture a bit more, we will be able to make private equity firms a place to spend a career for reasons beyond just money. By doing that, you may automatically get more diverse talent, including at the most senior levels.”
Building a more diverse set of leaders at the helm of the private markets industry requires sustained, nuanced, long-term effort. However, this research shows that progress is being intentionally made across several PE firms; and rewards come with that diversity, as IIs continue to prioritize and seek diverse talent to allocate their money to.