Despite progress made on diversity, equity, and inclusion (DEI) efforts in recent years, a new study from Honordex, Equality Group’s external DEI data measurement framework, found that such campaigns are losing traction within private equity’s largest firms.
The report analyzed nearly 300 firms with over $1 billion in assets under management and found that, while the average DEI score has increased this year, progress has stagnated at the higher end of the rankings. At an industry level, private equity remains unchanged at a ‘DEI Intermediate’ score.
“There was a huge wave of DEI commitments made by PE and VC firms and their portfolio companies following the BLM protests of 2020, with the US as the focal point of this movement,” says Anikka Villegas, Pitchbook Senior Analyst of Fund Strategies and Sustainable Investing.
Then, the U.S. Supreme Court’s June 2023 ruling against race-conscious affirmative action university admissions sparked concern over the possibility of broader anti-DEI litigation.
“While the Supreme Court decision doesn’t apply directly to private employers, we know that many private market participants have revised their DE&I programs in hopes of avoiding future litigation, which is a trend that is likely to persist,” Villegas adds.
“Still, this doesn’t mean that DE&I is ‘out,’” she clarifies, “just that the way it is being practiced will likely look different in the coming years.”
In all, 283 firms participated in the Honordex study and 117 earned an “intermediate” score, indicating the firm has taken some positive actions on DEI but has more work to do, according to grading criteria.
While 56 percent of firms—158 in all—received a ‘beginner’ score, as an industry, private equity is further ahead than venture capital peers, who have yet to progress past the ‘beginner’ threshold.
Beyond alternative investment firms, a similar trend is playing out across broader corporate America, where the number of companies with DEI programs has dropped 33 percent since 2020, according to Ayesha White, founder of Elevator, an organization dedicated to helping women of color in the workplace.
Even so, McKinsey partner Alexandra Nee provides a counterpoint: at least within private equity and venture capital, successful DEI initiatives may be related to stronger investment performance and returns.
“Data shows correlation between more diverse management teams and financial performance,” Nee said. She added that while some LPs are using DEI benchmarks as part of their allocation decisions, making GPs ineligible if they fail to meet certain criteria, other LPs are now doing the opposite—not investing in firms that have DEI campaigns.
Nee notes that, in either case, because of the fiduciary duty to stakeholders, LPs remain most concerned with a firm’s track record and expected returns.
On all sides, many have called for standardization of data tracked by DEI campaigns to remove subjectivity from the analysis. Proponents of DEI also concede that private equity and venture capital adopters should not expect it to be a turnkey or one-and-done solution.
As DEI faces its largest threat to date, observers will be watching closely over the next 12 months for signs that this is either a temporary setback or something more existential.