Private Equity is strong and has the potential to drive massive change across sectors

At first glance, private equity would seem an ideal destination for MBA graduates, as well as current and prospective students.

• Deal volume is growing, underscoring a logical spike in demand for talented professionals.
• Compensation continues to rise.
• Talent management trails only asset growth as a strategic priority.
• There has been statistical progress in raising participation by women and minorities.

A closer examination, however, indicates the path is challenging, for a number of compelling reasons, including primary the school attended; long-standing gender- and ethnic-parity issues and a unique internal process that emphasizes work experience prior to entering an MBA program.

The State of Play

Private equity health is robust, and continues to drive global growth in private markets.

Fundraising is strong across multiple regions, with worldwide totals approaching pre-pandemic highs. Assets under management hit a record $6.3 trillion in 2021, and achieved a collective internal rate of return of 27 percent. PE again was the highest-performing private markets asset class, and continues to top most public market alternatives.

Demand

Not surprisingly, this performance drives an increased need for professionals and also is broadening a historically selective recruiting process.

A Business Insider survey of the 13 business schools, for instance, shows that Northwestern University’s Kellogg School of Management, the Yale School of Management, and the Tuck School of Business at Dartmouth have intensified their recruiting for private-equity internships and full-time roles. The “Big 3” schools — Harvard Business School, Stanford Graduate School of Business, and The Wharton School of the University of Pennsylvania — continue to be the primary sources of demand.

Compensation

According to Stanford University’s Career Management Center, financial community hiring of MBA graduates remains robust and starting salaries continue to go up.

• In 2021, the average Stanford MBA grad earned a $158,400 base salary and an additional $67,500 in bonuses, on average, bringing starting pay to more than $225,000.
• Those who went into Private Equity, moreover, earned more than $338,000, including a base salary and bonuses.

Overall Diversity

A McKinsey & Co. study notes increases in the percentage of ethnically diverse talent and women at PE junior levels, as well in the rates of female promotion and retention in midlevel roles.

Gender Diversity

There has been progress, but the work is far from complete.

Here’s the reality, according to the EY 2021 Global Private Equity Survey:

• Women comprise just 20% of mid-level PE roles and 10% of senior roles.
• Yes, more women today work in PE, but – according to the study – here’s what that means:
  • Entry-level roles at U.S. PE firms now majority/ female.
  • Entry-level gender diversity is visible up through senior associate, vice president, and principal/director roles.

Female representation drops, however, at principal/director level and above … “the broken rung” of the career ladder. McKinsey says ethnic and gender diversity have not yet reached the C-suite at levels that would imply equity in the industry, suggesting that firms broadly continue to miss opportunities.

“Gender parity for promotions is still lacking at most step-ups in the pipeline, and the count of women in the uppermost roles, particularly the C-suite, continues to be underwhelming,” write McKinsey’s Alexandra Nee and David Quigley. “Furthermore, firm-wide diversity statistics tend to mask the disparity on deal teams (and hence in pay parity), as greater gender and ethnic diversity typically exists in non-investing and support functions of PE firms.”

Ethnic Diversity

The EY report notes that similar trends exist for ethnic minorities.

• 12% of bank employees are Black and 11% are Latino, similar to the percentages in the broader workforce. The figures drop to 4% or less at senior executive levels.
• PE percentages trail the bank numbers: Black employees comprise just 3% of all roles, and are even lower at more senior levels.

“One thing that has been a welcome change is just a lot more focus on diversity,” Sandra Horbach, co-head of U.S. buyout and growth at The Carlyle Group, told a conference late last year. “Unfortunately, a lot of investment firms are still not anywhere near where they need to be, especially at the senior levels, in terms of having diverse teams.” 

Ethnic parity numbers – and, therefore, the assessment – is skewed by one powerful dynamic: Asian professionals comprise more than 60 percent of ethnically diverse employees in PE today. More specifically, Asian representation at junior PE roles not only exerts a misleading influence on ethnic diversity statistics, it also blurs numbers for gender representation.

Reasons for Optimism

There is, of course, a well-known and a compelling business case to drive additional progress: research across the board indicates diversity can enhance performance. “There is a lot of data showing that having diversity of all kinds — including gender — around a board table leads to better-informed decisions and ultimately more successful outcomes,” says Julia Senior, partner at M/C Partners.

Additionally, more and more institutional investors are demanding that general partners provide diversity metrics for their firms and portfolios.

Deal teams also are becoming more diverse, observes a study by the International Finance Corporation, RockCreek, and Oliver Wyman, as they deliver an internal rate of return of 1.7 percentage points greater than male- or female-dominated funds.

Going Forward

Julie Coffman, Chief Diversity Officer at Bain & Company, believes private equity firms are uniquely positioned to take the lead on Diversity, Equity and Inclusion, including across their portfolios and the broader economy. “The private equity ecosystem has a chance to be incredible changemakers here,” she says. “Imagine the ripple effect through so many sectors of our economy.”

Photo from Chris Liverani