accounting for 3% of the industry’s AuM. Among VC investors in the USA, only 2% are Hispanic and 1% are Black. There is a clear lack of diversity across the industry, but our research into the effects of diversity of Lead Partner Teams (LPTs) of PE funds on buyout performance shows that more sociodemographic diversity – of age, gender and nationality – leads to higher deal returns. The PE industry is a resultsdriven game, where there are powerful incentives for LPTs to maximise their portfolio company’s value in a short holding period, as large parts of their compensation are tied to deal performance, so there is much to be said for increasing diversity to boost performance – and profits. All diversity can disrupt group processes while simultaneously creating synergistic performance benefits; for a long time, there has been a debate over the ‘bright side’ and the ‘dark side’. On the bright side, diversity is thought to offer improved, more nuanced decision-making due to a broader set of perspectives; on the dark side, the belief is that there will be deteriorated decision-making due to the potential for clashes and a lack of cooperation. Our research took in 241 buyouts between 1997 and 2015 – the vast majority (95.4%) from Europe and North America. Among those buyouts, there were 547 partners, of whom only 27 were female, and 42.8% fell into the 10-year age-group between 35 and 45, the figures demonstrating the lack of diversity, but the results showed the benefits of socio-demographic diversity where it does exist. There are different perspectives when this diversity occurs, but because the different perspectives are not the result of deliberate career choices, these differences are beneficial. Differences in gender, age or nationality do not mean that members do not still share large parts of their cognitive bases and values, reflected in common life choices around work experience and education. This diversity creates a broad pool of opinions with few of the diversity costs that create arguments and a lack of communication and cooperation. The bright side of diversity becomes even more important in complex deals and uncertain deal environments. Large or cross-border deals, as well as inorganic deal strategies, increase the complexity for PE firms, and distinct perspectives, holistic assessments and adaptive thinking are helpful in mastering the deal environment and removing additional transaction costs. The ability to be flexible is critical during times of environmental uncertainty, so LPTs with diverse backgrounds benefit from superior information assessment, with these diverse perspectives, skills and backgrounds becoming more valuable. The same here is true for occupational diversity – LPT members from across different departments and areas of business expertise – but that is not generally the case for PE deals, which tend to suffer worse results as a consequence of this form of diversity. Generally, an increase in occupational diversity can cause communication issues, and this highlights that specialisation in a particular field can be more valuable than occupational diversification. Unlike gender, nationality, or age, the diversity factors around professional skills and attributes gained throughout a career are voluntary and can lead to people with distinct values and cognitive bases – marketing vs finance perspectives, for instance. This creates a lack of common ground, putting up barriers to communication and cooperation, outweighing the potential benefits of additional perspectives. These issues around occupational diversity should not obscure the benefits of socio-demographic diversity, but rather can help PE firms find an adequate balance between too little and too much diversity in their hiring and staffing policies. There can be too much of a good thing when it comes to diversity, when it leads to a lack of a ‘common language’ or a shared value-set owing to differing fields of expertise, but it is beneficial to have as much socio-demographic diversity as possible in the workforce. Hopefully, these results can help to convince more PE firms that it pays to employ such a diverse workforce, and support the drive by non-profit initiatives such as Level 20 to increase diversity in the notoriously homogeneous PE industry. That can only be a good thing. Dr Benjamin Hammer is a Lecturer in Accounting and Finance at Lancaster University Leipzig, and a member of the Accounting and Finance Department in Lancaster University Management School. The paper The More the Merrier? Diversity and Private Equity Performance is co-authored by Silke Pettkus and Norbert Wünsche, of HHL Leipzig Graduate School of Management, and Professor Denis Schweizer, of the John Molson School of Business at Concordia University, Montreal. It is published in the British Journal of Management. b.hammer@lancaster.ac.uk FIFTY FOUR DEGREES | 19
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