Moving toward gender balance in private equity and venture capital IFC. IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our capital, expertise, and influence to create markets and opportunities in the toughest areas of the world. In fiscal year 2018, we delivered more than $23 billion in long-term financing for developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org. Oliver Wyman. Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across nearly 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www. oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman. RockCreek. RockCreek is a leading global investment management firm that applies data-driven technology and innovation to investing. Its portfolio managers invest in emerging markets and alternatives, and its asset allocation teams invest in multi-asset class and outsourced CIO portfolios and customized solutions. RockCreek’s client base is made up of sophisticated institutional investors, including endowments, foundations, pension plans, and sovereign funds. The firm is highly focused on the integration of environmental, social, and governance (ESG) factors and sustainable impact across portfolios to generate long-term returns. RockCreek has a culture of diversity, debate, and relentless drive to excel. For more information, visit www. therockcreekgroup.com. © International Finance Corporation 2019. All rights reserved. International Finance Corporation (“IFC”), a member of the World Bank Group (“WBG”) 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org TABLE OF CONTENTS Abbreviations and Acronyms 4 Boxes, Case Studies, Figures, and Tables 5 Forewords 8 Acknowledgments 11 EXECUTIVE SUMMARY 13 Top Ten Findings 15 Recommendations 17 I. OVERVIEW AND APPROACH 20 Report Objectives 20 Overview of Private Equity 20 Gender Diversity and Financial Performance 21 Methodology 24 II. GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL 27 Women as allocators of capital 27 Women as recipients of capital 31 III. THE RELATIONSHIP BETWEEN GENDER BALANCE 36 AND PERFORMANCE Gender balanced fund performance 36 Benefits of gender balanced General Partners 43 Gender balanced portfolio company performance 50 Benefits of gender balanced portfolio companies 51 IV. STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE 54 TOWARD GENDER BALANCE General Partners–Managing the Talent Pipeline 54 General Partners–Managing the Investment Funnel 75 Limited Partners–Catalyzing Change in General Partners 94 V. CONCLUSION 101 Bibliography 102 Appendix A: Detailed Methodology 108 Appendix B: Overview of existing research on gender diversity and performance 135 3 ABBREVIATIONS AND ACRONYMS AP2 Andra AP-fonden AUM Assets under management B2C Business to consumer BCa Bias corrected and accelerated CAGR Compound annual growth rate CEO Chief executive officer CI Confidence interval CPP Canada Pension Plan CPPIB Canada Pension Plan Investment Board DDQ Due diligence questionnaire DPI Development Partners International DPI Distributions to paid-in EBIT Earnings before interest and taxes EBITDA Earnings before interest, tax, depreciation and amortization ECA Europe and Central Asia EPS Earnings per share GIVE Goals, invest, volunteer, educate GP General Partner IFC International Finance Corporation ILPA Institutional Limited Partners Association IPO Initial public offering IRR Internal rate of return LAC Latin America and Caribbean LP Limited Partner LPAC Limited Partner Advisory Committee MENA Middle East and North Africa MMC Marsh and McLennan Companies OLS Ordinary least squares OW Oliver Wyman PE Private Equity PEWIN Private Equity Women Investor Network RVPI Residual Value Paid-in SSA Sub-Saharan Africa STEM Science, technology, engineering and mathematics TVPI Total-value to paid-in VC Venture Capital WBG World Bank Group 4 BOXES, CASE STUDIES, FIGURES, AND TABLES BOXES Box 1: Chinese Private Equity and Venture Capital 29 CASE STUDIES Case Study 1: Development Partners International 42 Case Study 2: Lightspeed Venture Partners 49 Case Study 3: Canada Pension Plan Investment Board 60 Case Study 4: The RockCreek Group 65 Case Study 5: Multiples Alternate Asset Management 70 Case Study 6: 500 Startups 81 Case Study 7: Flat6Labs 82 Case Study 8: Village Capital 85 Case Study 9: Kapor Capital 88 Case Study 10: General Atlantic 92 Case Study 11: Andra AP-fonden 96 Case Study 12: Institutional Limited Partners Association 98 FIGURES Figure 1: Aggregate Capital Raised by Private Equity and Venture Capital 21 Funds Focused on Emerging Markets, 2008–17 Figure 2: Stakeholders in Private Equity and Venture Capital 22 Figure 3: Definition of Gender Balanced and Male or Female Dominated Teams 24 Figure 4: Framework for understanding Female Representation in Leadership in 25 General Partners and Portfolio Companies Figure 5: Percent of Senior Investment Professionals Across Private Equity and 28 Venture Capital who are Female Figure 6: Female Ownership Rates in Businesses across Emerging Markets 29 Figure 7: Sample of female-led Chinese Private Equity and Venture Capital Firms and 29 “unicorn” portfolio companies Figure 8: Gender Composition of Senior Teams 30 Figure 9: Percent of Capital Recipients who are Female by Geography 31 Figure 10: Percent of Capital Recipients who are Female by Investment Stage 32 Figure 11: Path of Portfolio Companies Based on Gender of Company’s CEO at 33 Time of Identified Deal 5 Figure 12: Gender Composition of Senior Leadership Teams of Portfolio Companies 34 Figure 13: Performance of Emerging Market Funds, Excess Net IRR to Relevant Benchmark 37 given Vintage, Geography and Strategy Figure 14: Performance of Emerging Market Funds by Strategy, Excess Net IRR to Relevant 38 Benchmark given Vintage, Geography and Strategy Figure 15: Performance of Emerging Market Funds by Geography, Excess Net IRR to Relevant 39 Benchmark given Vintage, Geography and Strategy Figure 16: Performance of Emerging Market Funds, Excess Net TVPI to Relevant Benchmark 40 given Vintage, Geography and Strategy Figure 17: Performance of Emerging Market Funds by Strategy, Excess Net TVPI to Relevant 40 Benchmark given Vintage, Geography and Strategy Figure 18: Performance of Emerging Market Funds by Geography, Excess Net TVPI to Relevant 41 Benchmark given Vintage, Geography and Strategy Figure 19: Percent of General Partners who Believe that Increased Gender Diversity would 43 Improve Performance Figure 20: Emerging Markets General Partners’ View on Benefits of Gender Diversity 44 Figure 21: Emerging Markets General Partners’ View on Additional Benefits of Gender Diversity 45 Figure 22: Limited Partners’ View on Importance of General Partners’ Gender Diversity 46 Figure 23:Percent of Deals with Female CEO by Deal Partner Gender 48 Figure 24: Valuation Change of Portfolio Company by Gender Composition of Senior 50 Leadership Team Figure 25: Annualized Valuation Change of Portfolio Companies Relative to Benchmarks 51 given Year of Investment and Geography Figure 26: General Partners’ View on Benefits of Gender Diversity in Portfolio Companies 52 Figure 27: General Partners’ View on Drivers of Low Gender Diversity 55 Figure 28: Percent of General Partner Employees who Believe Increasing Gender Diversity 56 is a Firm Priority Figure 29: Types of Gender Diversity Targets 57 Figure 30: Most common recruiting channels for junior and senior hiresets 62 Figure 31: Most Important Qualities when Hiring Junior Talent 63 Figure 32: Most Common Prior Industry Experience of Junior and Senior Hires 64 Figure 33: Parental Leave and Junior Employee Perceptions 67 Figure 34: Junior Employees’ Career Perceptions by Gender 71 Figure 35: Female Respondents’ View on Drivers for Low Gender Diversity 72 Figure 36: Percent of General Partner Investment Employees who are Female 74 Figure 37: General Partners’ View on Drivers for Low Female Representation in 76 Portfolio Companies Figure 38: Total Female Entrepreneurship Rates Compared to Percent of Female-Led Companies 77 Receiving Private Equity or Venture Capital Investments by Market Figure 39: Percent of Deals by Industry in Overall Market and Female-Led Businesses 78 Figure 40: Most Common Channels for Deal Sourcing 80 Figure 41: Most Important Attributes of Portfolio Companies for Investment Decision 83 Making by General Partners Figure 42: Most Common Channels for Sourcing Portfolio Companies’ Senior Leadership 87 6 Figure 43: General Partners’ Perception of Limited Partners 94 Figure 44: Overview of Iterative Research Method 109 Figure 45: Percent of General Partners with Gender Data by Geography and Investment Strategy 111 Figure 46: Percent of Funds with Performance Data by Geography and Investment Strategy 112 Figure 47: Funds with Performance Data by Vintage, 2003–2018 113 Figure 48: Median Net IRR by Geography for Benchmark Data 114 Figure 49: Median Net IRR by Investment Strategy for Benchmark Data 115 Figure 50: Median Net IRR by Vintage for Benchmark Data 116 Figure 51: Distribution of Excess Net IRR for Benchmark Data 116 Figure 52: Median Difference of Baseline Gender Balance Definition Histogram from 118 Bootstrapped Simulations Figure 53: Portfolio Companies by Geography and Deal Type 124 Figure 54: Annualized Company Valuation Increases by Region and Initial Investment Year 125 Figure 55: Distribution of Excess Annualized Valuation Increase 126 Figure 56: Distribution of Differences in Median Excess Valuation Changes for Portfolio 127 Companies from Bootstrapped Simulations Figure 57: Share of Emerging Market Survey Respondents by Geography 132 Figure 58: Survey Respondents by Primary Investment Location 133 Figure 59: Percent of General Partners by Assets Under Management and Investment Strategy 134 Figure 60: Percent of Limited Partners Firms by Assets Under Management and 134 Investment Strategy TABLES Table1: Bootstrap Resampling Results for Different General Partner Diversity Levels 119 Table 2: BCa Confidence Intervals for Median Difference in Gender Balanced vs. Male/Female 120 Dominated Funds’ Excess Returns Table 3a: Median Difference Estimate and BCa Confidence Intervals in Fund Size 120 Quantile Regression Table 3b: Median Difference Estimate and BCa Confidence Intervals in Fund Size 120 Quantile Regression Table 4: Performance Comparison across Benchmark Options 121 Table 5: Performance Comparison across Vintage Year Cut-Offs 122 Table 6: Percentile Comparison for Excess Net Internal Rate of Return (IRR) 122 Table 7: Percentile comparison for eEcess Total Value to Pain-in (TVPI) multiple 122 Table 8: Bootstrap Resampling Results for Different Portfolio Company Diversity Levels 128 Table 9: BCa Confidence Intervals for Median Difference in Gender Balanced vs. Male/Female 129 Dominated Portfolio Companies’ Excess Valuation Changes Table 10: Performance Comparison across Benchmark Options 129 Table 11: Performance Comparison at Different Percentiles 129 Table12: Valid Responses by Seniority and Gender from Emerging Markets within General 131 Partners and Limited Partners Table 13: Emerging Market Survey Respondents by Role and Gender 133 Table 14: Summary of Existing Research on Relationship between Gender Diversity 135 and Performance 7 FOREWORDS IFC At IFC, we have long enabled companies and economies to grow by strengthening women’s participation in the private sector, and we have witnessed the benefits that materialize from gender diversity in building companies that deliver financial returns as well as positive social benefits. And yet, in the private equity and venture capital industry, women remain severely underrepresented as investment decision-makers. There are few women in the leadership of private equity and venture capital firms, or in the leadership of the companies in which these firms invest. This report, Moving Toward Gender Balance in Private Equity and Venture Capital has several objectives. For the first time, it shares data on gender diversity in emerging markets’ private equity and venture capital firms. The report examines the correlation between diversity and fund performance. It looks at the relationship between gender diversity at fund management and the impact on access to capital for women founders. And based on evidence collected on these three issues, the report makes recommendations about what can be done to increase gender diversity in funds and at the portfolio company level, with an aim of optimizing returns and social outcomes. We looked at 6,000 funds and over 5,000 portfolio companies for gender data, and of those, 700 funds and 500 portfolio companies provided performance data. We analyzed this database along with survey responses from more than 500 fund managers and institutional investors, and interviews with more than 50 industry practitioners and academic experts. Among the report’s many findings: Data shows that when companies have gender-balanced teams their returns can be as much as 20 percent higher; and women partners invested in almost two times more in many women-owned companies as did their male partners, giving women more opportunity to grow their businesses and create jobs. By sharing the results of this report and demonstrating that diverse teams yield higher returns and enhanced outcomes, IFC seeks to promote positive change in the private equity and venture capital industry. We encourage our clients and partners to use this report to define their goals on gender diversity, and we hope the report will serve as an inspiration to assess gaps and drive change to achieve gender balance. On behalf of IFC, I would like to thank RockCreek and Oliver Wyman, and all others who generously shared their data and perspectives. I am confident that these findings will support the growth of private equity and venture capital in emerging markets while providing women with more equal opportunities as entrepreneurs, investors, and business leaders. Philippe Le Houérou Chief Executive Officer, IFC 8 ROCKCREEK When RockCreek was founded in 2002, we set out to build a different kind of investment-management firm: one that nurtures a dynamic team with a global perspective to generate strong returns and develop innovative solutions for institutional investors. We realized that our inclusive culture, which celebrates a diversity of backgrounds and perspectives, would also reflect positively in our investment decisions. Today, RockCreek is recognized as one of the largest women-founded firms with around $14 billion in assets under management, proudly leading the industry in generating high returns for some of the most sophisticated investors. Ninety percent of our senior management team come from diverse backgrounds and more than half of our underlying private portfolio companies are female-led businesses. That’s why we are excited to share our expertise for this report, Moving Toward Gender Balance in Private Equity and Venture Capital, in collaboration with IFC and Oliver Wyman. The report uses data to quantify the relationship between fund performance and gender diversity and identifies several actions investors can take to move the private equity industry toward gender balance. At RockCreek, we are committed to exploring data-driven ways to reshape the investment landscape both internally and externally with our investors and the larger industry with whom we collaborate. As the report suggests, there still is work to be done to ensure that the benefits of gender diversity are embraced by all in the alternative investment industry. While we are proud to be considered a gender- balanced firm, the reality is that many investors in both developed and emerging markets are not. At RockCreek, we believe the best way to improve gender balance in the industry is to provide leadership and focus on performance. We were fortunate to work with IFC and Oliver Wyman on this important research to share the potential performance benefits that can be gained by firms if they focus on increasing gender diversity of their leadership and investments. Institutional investors have a tremendous opportunity to drive long-term change in the industry. I hope the data-driven insights and the recommendations offered in this report inspire investors, asset allocators and fund managers to take the steps to increasing gender diversity - ask questions, set goals, and measure progress. These simple actions will lead the industry towards better performance for all. Afsaneh Beschloss Founder and CEO, RockCreek 9 OLIVER WYMAN More women today are rising to the top leadership ranks of business, government, and society than a generation ago. But progress has been too slow and much work remains to be done. Oliver Wyman is committed to strengthening the role of women leaders everywhere. The challenge—and opportunity—is to figure out how to close the gap more quickly by refusing to accept that “we are already doing everything we can to ensure more women join and help lead our organizations.” Diversity gaps will not fix themselves; solving the problem requires determination, persistence, advocacy, open-mindedness, and, sometimes, hard decisions. Oliver Wyman regularly conducts leading edge research on gender diversity across regions and industries, including our bi-annual Women in Financial Services series and reports on gender leadership gaps in healthcare and in the nation of Brazil. Moving Toward Gender Balance in Private Equity and Venture Capital furthers our contribution to this important topic. It shines a light on gender imbalances inside private equity firms operating in emerging markets, as well as inside the companies those firms own. The analysis is rooted in performance data and enhanced and enlivened by information gathered through a bespoke survey and through detailed interviews of senior business leaders and other experts. We also explore the underlying drivers of persistent gender gaps and outline the business case for change. While our findings, analysis, and recommendations are aimed at private equity, they apply not only across the financial services industry but the entire business community and beyond. We hope you find the report useful and that it stimulates ideas for achieving greater gender diversity. On behalf of Oliver Wyman, we thank IFC and RockCreek, as well as our advisers, interviewees, and survey respondents, for their support and insights. John Romeo Julia Hobart Managing Partner, OW Forum, Oliver Wyman Partner, Wealth Asset Management, Oliver Wyman 10 ACKNOWLEDGMENTS This publication, Moving Toward Gender Balance in Private Equity and Venture Capital, is brought to you by International Finance Corporation (IFC), Oliver Wyman (OW), and RockCreek. Funding for this report was provided by RockCreek, one of the largest female-founded investment firms, and the Government of Canada. In its partnership with Canada, IFC is committed to identifying key constraints affecting women’s economic empowerment and reducing gender inequalities through business environment reforms, strengthening women-owned enterprises, and creating better employment opportunities for women. This publication was developed under the overall guidance of Stephanie von Friedeburg, Chief Operating Officer IFC, Hans Peter Lankes, Vice President IFC Economics and Private Sector Development, Atul Mehta, Senior Director IFC Telecom, Media and Technology, Venture Capital & Funds, Maria Kozloski, Global Head & Senior Manager IFC Private Equity Funds, Nikunj Jinsi, Senior Manager IFC Venture Investing, Henriette Kolb, Manager IFC Gender Secretariat, Afsaneh Beschloss, Founder and CEO RockCreek, Laura Tyson, Senior Advisor RockCreek, Mina Mashayekhi, Senior Advisor RockCreek, Alifia Doriwala, Managing Director RockCreek, John Romeo, Managing Partner OW Forum, Dominik Treeck, Partner Public Sector OW, Julia Hobart, Partner Wealth and Asset Management OW, Samir Misra, Partner Wealth and Asset Management OW. The core working group of the initiative, jointly led by Shruti Chandrashekar and Heather Kipnis, comprises Stephanie Bamfo, Bhattiprolu Murti, Robert Wright, and Anjani Vedula from IFC; Elena Blueggel, Paul Tyger and Rachel Li from OW; and Anda Bordean, Caleb Chertow, Maryam Mashayekhi, and Sherri Rossoff from RockCreek. The research was guided by an advisory committee whose contributions were essential to the report. The team would like to thank these advisors: •• Runa Alam, Co-founder and CEO, Development Partners International •• William (Bill) E. Ford, CEO and Managing Director, General Atlantic •• Caren Grown, Senior Director Gender, World Bank •• Jenny Lee, Managing Director, GGV Capital •• Shelby Wanstrath, Senior Investment Manager of Private Equity, Teacher Retirement System of Texas •• Claudia Zeisberger, Senior Affiliate Professor of Entrepreneurship & Family Enterprise at INSEAD; Academic Director of its Global Private Equity Initiative (GPEI) 11 IFC, OW, and RockCreek thank the many experts around the world who generously contributed their time and expertise, and who were willing to share data and their experience to add to the richness of the report: Albert Alsina, Mediterrania Capital Partners; Amy Luinstra, IFC; Ana Carla Abrao, OW; Andrea Auberach, Cambridge Associates; Andrea Heinzer, Obviam; Annie Paydar, General Atlantic; Baris Gen, IFC; Bedy Yang, 500 Startups; Camilla Axvi, AP2; Carlotta Saporito, CDC Group; Carmen Niethammer, IFC; Catherine Leung, MizMaa Ventures; Christina Gaw, Gaw Capital; Clara Chan, HK Monetary Authority; Clarisa de Franco, CDC Group; Cyril Collon, Partech; Deepak Menon, Village Capital; Dina el-Shenoufy, Flat6 Labs; Freada Klein, Kapor Capital; Hale Ozsoy, Turkven Private Equity; Heidi Gardner, Harvard Law School; Issa Aghabi, IFC; Jennifer Petrini, IFC; Jeremy Liew, Lightspeed Partners; Jesus Arguelles, former OTPP; Joslin Jose, Village Capital; Katherine Klein, Wharton Social Impact Initiative; Leigh Moran, Calvert;  Lopa Rahman, IFC; Magda Magnuszewska, Innova Capital; Michelle Dipp, General Atlantic; Nashat Masri, Foursan Capital Partners; Priscila Rodrigues, Crescera Investimentos; Ralph Keitel, IFC; Rupal Kantaria, OW; Sara Taylor, CDC Group; Shalaka Joshi, IFC; Suyi Kim, CPPIB; Suzanne Biegel, Catalyst at Large; Tamsin Jones, The Boardroom Africa; Tidjane Deme, Partech; Ulili Onovakpuri, Kapor Capital; Vinika Rao, INSEAD; Vipul Baghat, IFC; Xiaomin Mao, IFC; Yan Wang, RockCreek; Yemi Lalude, TPG Growth.  12 EXECUTIVE SUMMARY EXECUTIVE SUMMARY Women are significantly underrepresented among the We find that the gender gaps in the representation of investment decision-makers at private equity and venture women as allocators and recipients of capital put access to capital firms, as well as in the leadership of companies that financing at risk for female entrepreneurs and may reduce receive this investment capital. Women hold only 10 percent investment returns for funds. Given that private equity and of all senior positions in private equity and venture capital venture capital are still nascent in many emerging markets, firms globally, and women-led enterprises collected less changes made now can have a significant impact in the than 3 percent of global venture capital in 2017 (Preqin 2017; long run to move the industry toward gender balance. Zarya, 2018). This would impact General Partners and Limited Partners, as well as entrepreneurs receiving capital to grow their These firms provide a unique and sizable source of capital businesses. This report answers three questions: for entrepreneurs in emerging markets. Although this •• How gender balanced are leadership teams of General asset class represents a small portion of total global assets Partners, which allocate capital, and of portfolio under management, it provides entrepreneurs access to companies, which receive investments? funding when public equity markets and debt may be less •• Are there benefits of moving leadership teams viable sources of capital. Private equity and venture capital toward gender balance within General Partners and represent approximately US$3 trillion of more than US$75 portfolio companies? trillion global assets under management.1 Nearly US$800 •• What can General Partners do to move toward gender billion is dedicated to funds investing in emerging markets balance in their leadership teams and those of the (Preqin 2018a, 2018b).2 portfolio companies they invest in? Our research examines gender balance—defined as To answer these questions, IFC, RockCreek, and leadership teams with at least 30 percent of men and Oliver Wyman used gender data across thousands of women—in private equity and venture capital funds and General Partners and portfolio companies operating in the companies they invest in within emerging markets. Our emerging markets. We gathered performance and gender focus includes East Asia (including Southeast Asia), Europe diversity data for more than 700 funds and 500 portfolio and Central Asia, Latin America and the Caribbean, Middle companies. We analyzed this database along with survey East and North Africa, South Asia, and Sub-Saharan Africa. responses from more than 500 General Partners and We explore the relationship between gender balance and Limited Partners and interviews with more than 50 industry fund performance, and the roles that general partners, practitioners and academic experts. the vehicles investing private equity and venture capital funds, and limited partners, the source of capital, can play in alleviating gender gaps in investment funds and their portfolio companies. 13 MOVING TOWARD GENDER BALANCE IN PRIVATE EQUITY AND VENTURE CAPITAL INSTITUTIONAL INVESTORS 65% BUT 25% Consider gender diversity Ask about gender important when investing diversity in due diligence Committing capital to funds PRIVATE EQUITY & Gender balanced teams have VENTURE CAPITAL 15% AND better returns FUNDS Senior investment 20% teams are gender HIGHER balanced NET IRR Female partners invested in almost Investing capital in companies 2X MORE female entrepreneurs than male partners PORTFOLIO Gender balanced COMPANIES 20% teams have higher valuation increases AND Of leadership teams are gender balanced 64% VS. 55% Gender balanced teams have between 30% to 70% female in leadership roles EXECUTIVE SUMMARY TOP TEN FINDINGS LIMITED PARTNERS 1. Limited Partners generally view gender diversity as important, but this importance is not seen by General Partners. About 65 percent of limited partners interviewed and surveyed view gender diversity of a firm’s investment team as important when committing capital to funds. However, General Partners report that less than 30 percent of their Limited Partners view gender diversity as an important consideration when making investment decisions. 2. Limited Partners investing in emerging market General Partners are not asking about gender diversity or incentivizing General Partners to move toward gender balance. According to General Partners, only about 25 percent of their Limited Partners ask about gender diversity of their investment teams when conducting due diligence. Furthermore, General Partners report that only about 20 percent of their Limited Partners encourage them to improve gender diversity outcomes as a condition of committing capital. The lack of action by Limited Partners could explain the disconnect between the importance Limited Partners place on gender diversity and what is perceived by General Partners. In any case, it is clear that more can be done by Limited Partners to drive long-term change in the industry. GENERAL PARTNERS 3. Eleven percent of senior investment professionals in emerging markets private equity and venture capital are women. Emerging market female representation is largely comparable to that of developed markets (10 percent), but this statistic is largely buoyed by China. Excluding China, in which 15 percent of senior investment professionals are women, female representation in emerging markets falls to 8 percent. To put these numbers into context, women in leadership in private equity and venture capital lags female senior representation in businesses from other sectors by about 17 percentage points. 4. Only 15 percent of senior investment teams are gender balanced and nearly 70 percent are all male. As such, most investment and capital allocation decisions are being made by teams that are male dominated and likely not reaping the potential benefits afforded to gender balanced teams. Our research finds these benefits likely include enhanced investment decision making and deal sourcing. 5. The performance of gender balanced investment teams is correlated with higher returns. Gender balanced funds realized excess net internal rate of return of 1.7 percentage points greater than male- or female-dominated funds when controlling for vintage, geography, and strategy.3 This difference in performance is about 20 percent of the median net internal rate of return in emerging markets. This positive correlation between gender balance and performance holds across investment strategies and geographies, as well as when controlling for fund size. 6. The lack of gender balance is likely reinforced by insufficient diversity goal setting and exclusive recruiting practices. Sixty-seven percent of General Partners surveyed said achieving gender balance in their investment partner teams is important to their firm. Yet less than 10 percent of General Partners have strategies or targets for improving the promotion rate for female employees. The most common means of sourcing junior and senior hires is through referrals and professional networks. Identified candidates are then predominantly evaluated in terms of “culture fit,” which is viewed as 50 percent more important than the next 15 EXECUTIVE SUMMARY most important factor, work experience. Individually, each practice puts male-dominated firms at risk of perpetuating the male status quo in leadership within the industry. When combined, the problem is exacerbated and potentially less visible to male leaders. This could explain, in part, why women are about 67 percent more likely to attribute low female senior representation to internal firm factors than men. PORTFOLIO COMPANIES 7. Seven percent of private equity and venture capital is invested in female-led businesses. The median female-led business has received only 65 percent of the funding received by the median male-led business. This gap is largely explained by the fact that more female- led businesses receive more funding in early stages (e.g., accelerator or incubator) where the investment sizes are smaller than later stages (e.g., later stage VC, growth equity, and buyout) where the investment sizes are larger. This skew in part may be because female-led businesses are slightly less likely to receive second round funding than male-led businesses (13 percent compared with 17 percent, respectively). It also may be explained by greater frequency with which female leaders receiving initial rounds of funding appear to be replaced by male leaders in subsequent rounds 8. About 20 percent of portfolio companies have gender balanced senior leadership teams, while nearly 70 percent are all male. Emerging market private equity and venture capital funds tend to invest in few gender balanced leadership teams, despite the belief, as evidenced through surveyed respondents, that gender balanced teams have improved decision making, enhanced governance, and a better ability to tap into larger markets by serving a more diverse customer base. 9. Gender balanced leadership teams are correlated with approximately 25 percent greater increases in valuation than unbalanced teams. The median gender balanced portfolio company experienced a 64 percent increase in company valuation between two rounds of funding or liquidity events. This was about 10 percentage points greater than that of gender-imbalanced portfolio companies. When controlling for vintage, geographic market, and holding period of investments, the median gender balanced portfolio company outperformed peers by more than 5.5 percentage points in valuation increase per year. 10. Imbalance in portfolio companies appears related to imbalance in General Partner investment teams. Our data show that female deal partners invested in almost twice as many female-led businesses than male deal partners. Our survey suggests that networks play a crucial role in both sourcing investment opportunities and identifying senior management for portfolio companies, so expanding General Partner talent pools across genders could help General Partners invest in and move portfolio companies toward gender balance. 16 EXECUTIVE SUMMARY RECOMMENDATIONS This report finds that the private equity and venture capital industry in emerging markets can close gender gaps between men and women while maintaining or increasing returns. However, several barriers prevent women from fully capturing the opportunity to participate as leaders that allocate and receive investment capital. Some barriers—such as those related to closed networks, unconscious biases, or lack of gender diversity commitments—require concerted efforts from multiple stakeholders to be overcome. Nevertheless, these challenges must be factored in by leading General Partners in their talent management activities and by both General Partners and Limited Partners in their investment decision making to close gender gaps in the industry. This report identifies several actions General Partners and Limited Partners can take to move the private equity industry toward gender balance. LIMITED PARTNERS Ask about gender diversity in the due diligence process. Asking General Partners questions about their current diversity levels and plans to improve outcomes is a key step in influencing General Partners, but General Partners are not being asked these questions in due diligence by most of their Limited Partners. This gap is important, because General Partners and Limited Partners said the most significant change in the industry on gender diversity will come only when Limited Partners collectively bring this issue to the forefront. Limited Partners can adopt standardized due diligence questions, such as the questions proposed in the diversity and inclusion section of the Institutional Limited Partners Association Due Diligence guide, which includes questions covering initiatives and policies (e.g., harassment, discrimination, and family leave) in both General Partners’ and their funds’ portfolio companies.4 Establish investment goals or targets related to the diversity of investments. Most Limited Partners believe gender diversity of General Partner investment teams is important when committing capital, but less than half have established goals related to gender diversity. Interviews with both General and Limited Partners suggest that goals send a strong signal to General Partners that the organization is committed to issues of diversity, while also providing a backdrop to measure and assess progress toward gender balance. Examples of goals include increasing the number of General Partners that provide sex-disaggregated data on women in their funds and portfolio companies, improving the proportion of capital allocated to gender balanced investment teams, and investing only in General Partners with gender diverse teams. GENERAL PARTNERS Establish a tone at the top for improving gender diversity. Two-thirds of General Partners view achieving gender balance in investment partners as a priority, but less than half have strategies for achieving it.6 This lack of action is reflected in the perceptions of junior female employees of General 17 EXECUTIVE SUMMARY Partners, resulting in a mismatch between how senior leaders have prioritized gender diversity and how this is perceived by junior employees. This mismatch has consequences, because retention of junior female employees is essential for future progress in closing the gender gap within the leadership of General Partners. Junior female respondents are 50 percent less likely than junior men to believe men and women have an equal opportunity to become partner and about 40 percent less likely to believe their firms’ senior leaders are making gender diversity a priority. To change this, General Partners can do the following •• Set and communicate ambitious gender diversity goals to demonstrate commitment. •• Collect the necessary data to assess progress toward gender diversity against short-term targets. •• Make senior leadership accountable for progress towards gender diversity goals and targets. Support an internal environment that does not force a choice between family and career. Nearly 25 percent of surveyed General Partners do not offer maternity leave, and more than half do not offer paternity leave. For junior employees, women are more than three times likelier to believe that taking parental leave would greatly inhibit their careers. To change this, General Partners can take steps such as: : •• Offering maternity leave benefits. •• Providing and supporting equal maternity and paternity leave benefits. •• Enabling work–family management upon return from parental leave. •• Supporting flexible work initiatives for employees to balance work and family commitments Engage portfolio companies at the time of and after investment to drive change on gender diversity. Although most General Partners believe gender balance in portfolio companies’ management would improve returns, their actions don’t demonstrate buy-in. Less than 40 percent of surveyed emerging market General Partners track sex-disaggregated employment data, and about 33 percent actively pursue diverse candidates when sourcing talent for portfolio companies. General Partners can do the following: •• Affirm the General Partner’s commitment to diversity at the time of investment. •• Actively pursue gender-diverse talent for portfolio companies. •• Provide guidance and feedback on best practices in achieving better gender diversity outcomes. 18 EXECUTIVE SUMMARY EXECUTIVE SUMMARY NOTES 1 See the IPE website, “Total Global AUM Table 2018.” https://www.ipe.com/top-400/total-global- aum-table-2018/10007066.article. 2 These statistics (Preqin 2018b) include venture capital, growth equity and buyout, but do not include real estate or infrastructure investments. 3 Male or female dominated teams are ones in which there is not at least 30 percent representation of both men and women. This includes male dominated teams (i.e., less than 30 percent women) and female dominated (i.e., less than 30 percent men). 4 Institutional Limited Partners Association Due Diligence Questionnaire (DDQ) can be found on its website, https://ilpa.org/due-diligence-questionnaire/. 5 Limited Partner survey statistics are sourced from survey responses of 28 respondents from LPs. From IFC Gender Diversity in Private Equity and Venture Capital Survey, 2018. 6 General Partner survey statistics are sourced from survey responses of 476 respondents from General Partners, of which 250 are based in emerging markets. From IFC Gender Diversity in Private Equity and Venture Capital Survey, 2018. 19 OVERVIEW AND APPROACH I. OVERVIEW AND APPROACH REPORT OBJECTIVES and leaders of portfolio companies receiving capital. It then analyzes how this representation influences It is well documented that women are significantly gender balanced leadership teams for both GPs and underrepresented as investment decision makers in their portfolio companies. Chapter 3, “Relationship private equity (PE) and venture capital (VC) firms, as between Gender Balance and Performance,” assesses well as in the leadership of companies that receive the correlations between gender balanced leadership this investment capital. Only 10 percent of all senior teams and the performance of both GPs and portfolio positions in PE/VC firms globally are held by women, companies. Chapter 4, “Steps General Partners and and less than 3 percent of global VC was invested in Limited Partners Can Take to Move Toward Gender women-led teams in 2017 (Preqin 2017; Zarya 2018). Balance,” identifies the most significant barriers to gender balance in PE/VC and actionable steps that Our research analyzes these gender gaps in investors can take to overcome the barriers. PE/VC in emerging markets, and their relationship to performance through the view of gender balance: leadership teams with at least 30 percent of both men and women. Specifically, this report answers OVERVIEW OF three questions: PRIVATE EQUITY •• How gender balanced are leadership teams of General Partners (GPs), which allocate PE/VC Though PE/VC is less than 5 percent of global assets capital, and of portfolio companies, which receive under management, it is an important source of capital private equity and venture capital investments? for catalyzing the growth of businesses (IPE 2018; •• Are there benefits of moving leadership Preqin 2018a). PE/VC assets under management teams toward gender balance within GPs and totaled more than US$3 trillion at the end of 2017, portfolio companies? of which nearly US$800 billion is dedicated to funds •• What can GPs do to move toward gender balance investing in emerging markets (Preqin 2018a, 2018b). in their leadership teams and those of the portfolio Approximately 25 percent, or US$825 billion, of PE/ companies they invest in? VC capital raised between 2008 and 2017 was for funds focused on emerging markets.1 Emerging Asia, which The report is organized around these questions. The was predominantly driven by China, accounts for nearly remainder of this chapter provides context on the 80 percent of this fundraising (Preqin 2018b). Figure 1 PE/VC industry in emerging markets, a summary of shows a breakdown of capital raised in different regions. the existing research on the preceding key questions, and an overview of the fact base we use to answer the There are three types of PE/VC stakeholders covered questions. Chapter 2, “Gender Gaps in Private Equity by this research: (a) LPs, which allocate capital to funds; and Venture Capital,” explores female representation (b) GPs, which manage a fund and invest capital raised; within senior investment professionals allocating capital and (c) portfolio companies, which receive capital from 20 OVERVIEW AND APPROACH Figure 1: Aggregate Capital Raised by Private Equity and Venture Capital Funds Focused on Emerging Markets, 2008–17 $, BILLIONS 140 Diversified Emerging Markets Middle East 70 Latin America Emerging Asia Central and Eastern Europe 0 Africa 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YEAR OF FINAL CLOSE Source: Preqin 2018b Note: Diversified Emerging Markets includes funds that invest in multiple emerging market regions. Emerging Asia excludes Hong Kong, Japan, and Singapore a fund to grow their businesses. Returns are generated documented and generally accepted in business from these investments when a fund successfully exits and academia. Diverse leadership teams are less a business, which includes selling its equity stake to likely to exercise group think and carry conscious and another party at a value higher than the investment unconscious biases in decision-making processes. cost (e.g., through an initial public offering, trade sale They tend to encourage team members to become to a strategic partner, sale to another PE/VC fund, more aware of their entrenched ways of thinking and or acquisition by another company). The relationships question their assumptions, which in return helps them between these stakeholders are highlighted in Figure 2. better process information and avoid making errors The primary focus of this research is on gender diversity in decision-making processes (Rock and Grant 2016). in GPs (e.g., PE/VC firms) as allocators of capital and Gender diversity—the equitable or fair representation of portfolio companies as recipients of capital. This research people of different genders2 —can introduce different also explores the role LPs can play in driving change perspectives, problem-solving approaches, and through its role investing in funds. increase innovation and risk management effectiveness (Rock and Grant 2016). However, researchers seeking to quantify the benefits of GENDER DIVERSITY diversity, including gender diversity, on organizational AND FINANCIAL performance face several hurdles. These problems are often exacerbated at the intersection of illiquid PE/ PERFORMANCE VC investments and emerging markets. For instance, decision-making dynamics vary across organizations, There is significant research outlining the benefits and it is hard to ascertain and reflect those idiosyncrasies of diversity in leadership. The expected benefits of both at scale and through time. Sufficiently large increasing diverse perspectives within teams, of samples of reliable gender and performance data are which gender diversity is one component, are well hard to acquire in consistent forms. Finally, the lack 21 OVERVIEW AND APPROACH Figure 2: Stakeholders in Private Equity and Venture Capital 1 LIMITED PARTNERS Includes sovereign wealth funds, pension funds, multilateral development banks, funds of funds, development finance institutions, and family o ces Contribute capital 2 INVESTMENT GENERAL PARTNERS Invest the fund and FUNDS manage the investments Includes venture capital, growth equity, buyout, real estate, The fund invests capital and infrastructure in portfolio companies private equity firms Capital returned to funds via exit proceeds 3 PORTFOLIO COMPANIES of gender diversity and the expected barriers to performance. Few findings suggest that increasing equal opportunity for men and women within PE/ gender diversity would negatively affect organizational VC could bias any data sample (e.g., limited female performance, with some exception to compulsory representation, less female industry experience) that changes driven by regulations (e.g., mandatory board could be used to assess the relationship between quotas [Ahern and Dittmar 2012]). performance and gender balance. Developed public markets have been analyzed, but Previous research on gender diverse leadership and generally focus on the gender diversity of boards of performance has been mixed, though most findings directors, which have repeatedly found a positive point to either positive correlations or no statistically relationship between greater board diversity levels significant relationships between gender diversity and and company performance (Eastman, Rallis, and 22 OVERVIEW AND APPROACH Mazzucchelli 2016; Stiehler and Freedman 2016). Public emerging markets have been studied in isolation and focused on specific geographies, but divergent methodologies and fact bases have shown positive and negative correlations between gender diversity and performance (Morningstar 2018; Nathan 2013; Pletzer et al. 2015; Sherif 2015). However, a meta-analysis of 20 academic studies on the relationship between female representation on corporate boards and firm financial performance has found that the effect of greater gender diversity was small and nonsignificant (Pletzer et al. 2015). Outside of direct financial performance, other researchers have found statistically significant correlations between higher shares of women on boards and greater stability within banks (Sahay, R., M. Čihák, and IMF Staff 2018), as well as benefits of stronger environmental, social, and governance (ESG) performance, which would be expected to lead to better business performance (Di Miceli and Donaggio 2018). Initial research in private markets, particularly venture capital in the United States, has generally found a positive relationship between diversity and performance, though some findings are mixed. Private markets have been analyzed from the perspective of individual venture capital funds, such as First Round Capital,3 and at portfolio levels for private debt, such as Calvert Impact Capital (Moran 2018). In both instances, the analysis has yielded a positive relationship between gender diversity and performance, though the findings have not been evaluated for statistical significance. More comprehensively, a research team from Harvard Business School focusing on investment decision makers in venture capital has found a positive relationship, suggesting that “firms that increased their proportion of female partner hires by 10 percent saw, on average, a 1.5 percent improvement in overall fund returns each year.” (Gompers and Kovvali 2018) However, findings of research sponsored by the Knight Foundation have found that U.S.-based funds managed by diverse-owned firms generally do not perform better or worse than nondiverse-owned firms within typically accepted statistical confidence intervals after controlling for relevant characteristics (Lerner et al. 2019). Little to no research has been done to explore the relationship in PE/VC in emerging markets. Our research aims to fill the void. We test the correlation between gender diverse leadership and performance in PE/VC for GPs—focusing on partner level in 23 OVERVIEW AND APPROACH investment roles—and portfolio companies—focusing balance could be positively related with returns. Thirty on executive team and board members—operating percent was used as the minimum threshold of the within emerging markets. Though the existing research opposite gender required to consider a team gender is mixed on the relationship between gender diversity balanced (see Figure 3), which is based on tipping and performance, we hope our research will contribute points identified by other organizations and research.4 to the discussion by looking at these questions from a Though research has not converged on one inflection unique perspective (gender balanced leadership, PE/ point, and a single tipping point for all organizations VC, emerging markets). A summary of the existing is likely overly precise, sensitivity analyses were research is provided in Appendix B. performed to assess the impact of the selected cut-off and are detailed in Appendix A, “Detailed Methodology.” METHODOLOGY The exploration of our research on gender balance in PE/ VC is framed in terms of two funnels—talent management This research explores whether the representation of and investment pipeline—whose components can gender (e.g., both men and women) in the leadership explain gender diversity outcomes of senior investment of GPs and portfolio companies is imbalanced, and professionals in GPs and the leadership teams of the impact that moving toward gender balance could portfolio companies. Both funnels, which are depicted have on financial performance. This research does not in Figure 4, are influenced by a combination of internal explore the optimal gender mix of decision makers, but and external factors. We also explore whether the rather tests whether moving toward greater gender funnels affect one another, e.g., if low diversity in senior Figure 3: Definition of Gender Balanced and Male or Female Dominated Teams Male Gender Female dominated balanced dominated Gender diversity spectrum 30% FEMALE 70% FEMALE 24 OVERVIEW AND APPROACH Figure 4: Framework for understanding Female Representation in Leadership in General Partners and Portfolio Companies TALENT MANAGEMENT FUNNEL INVESTMENT FUNNEL Qualified and interested female talent Investment ready female entrepreneurs Applications and Deal sourcing recruitment Interviewing Investment Firm culture and Hiring Firm culture process Retention and Post-investment Promotion oversight and exit FEMALE Self-reinforcing FEMALE LED SENIOR LEADERS cycle PORTFOLIO COMPANIES Internal factor External factor Note: Firm culture is a factor that affects all internal components of both the talent management and investment funnels. investment professionals is correlated with low diversity sources, including data from IFC, RockCreek, in portfolio companies. This framework was used PitchBook, and Preqin. to understand the barriers that exist across the talent •• Interviews of more than 50 GPs, LPs, and gender management and investment pipelines that are most experts across developed and emerging markets significantly driving the low representation of women to understand drivers of the low representation of women in the industry and recommendations for in the senior leadership of GPs, and in the leadership improving diversity. of portfolio companies, as well as the changes that can be made at each step in a GP’s talent management and •• Survey responses of more than 500 practitioners investment processes. from developed and emerging market PE/VC firms to test hypotheses on drivers of the business case and gender gaps in leadership and entrepreneurship Our research aims to unpack these two funnels to at scale. answer our three research questions. Both primary and secondary research were conducted. The four principal •• Case studies of more than 10 PE/VC GPs and LPs methods for the primary research include the following: from emerging markets and developed markets to showcase approaches in the industry that are being undertaken by investors to move toward more gender •• Quantitative analysis of gender diversity in balanced outcomes. leadership of more than 6,000 GPs and more than 5,400 portfolio companies and performance of Further details on the research fact base—including more than 700 funds and more than 500 portfolio a breakdown of the analyzed firms and survey companies to assess the size of gender gaps and analyze their relationship to financial performance. respondents—and the detailed methodology used to These data were sourced through a combination analyze this information are provided in Appendix A. of proprietary, third-party and publicly available 25 OVERVIEW AND APPROACH CHAPTER I NOTES 1 In Preqin (2018b), emerging markets include all economies in Africa, Asia (excluding Hong Kong SAR, China; Japan; and Singapore), Central and Eastern Europe, Latin America (South and Central America and the Caribbean) and the Middle East (excluding Israel). 2 The full scope of research on gender diversity would require a study of the full spectrum of gender identities; however, data are most easily available using the simplest form of the gender binary and does not evaluate nonmale or female gender identities. 3 See First Round 10 Year Project’s website, http://10years.firstround.com/. 4 Other organizations, such as the Thirty Percent Coalition and the 30% Club, seek to address gender imbalance in corporate boardrooms with 30 percent as an aspirational target. Separate research has supported a broad range as well. Research by Calvert Impact Capital, for instance, has found that return on assets of companies in their private debt portfolio steadily increased at around 30 percent women in senior leadership positions, peaked at approximately 50 percent, and tapered off after 70 percent (Moran 2018). Newton-Small (2016) finds that the presence of women begins to significantly change a diverse set of institutions between 20 percent to 30 percent. 5 Includes over 2,000 emerging market GPs and 4,000 developed market GPs 26 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL II. GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL Chapter 2 explores the first question of our research: how gender balanced are leadership teams of GPs, which allocate PE/VC capital, and portfolio companies, which receive PE/VC investments? Using data from more than 6,000 GPs and 5,400 portfolio companies, we analyze female representation of senior investment professionals and leaders of portfolio companies. We then analyze the extent of gender balance amongst leadership teams in both GPs and portfolio companies. For GPs, we find that only 11 percent of senior investment 11% professionals in emerging markets are women, which is roughly comparable to the 10 percent observed in developed markets. Only 15 percent of senior GP investment teams are gender balanced, while nearly 70 percent are all male. For portfolio companies, emerging market female entrepreneurs receive only about 7 percent of senior investment of investment capital, and less than 20 percent of senior leadership professionals in emerging market teams that receive capital are gender balanced. Private Equity and Venture Capital are female WOMEN AS ALLOCATORS OF CAPITAL In aggregate, women make up only 11 percent of senior investment professionals in PE/VC in emerging markets. This rate is largely similar to that of developed markets, but entails significant variance across emerging market regions. Aggregate emerging market diversity statistics are buoyed by relatively high representation of female senior investment professionals in East Asia, particularly China. Female representation in emerging markets, excluding China, is only 8 percent. These gender diversity statistics are summarized in Figure 5. China, which makes up more than 90 percent of East Asia’s senior investment professionals, has more than 40 percent of the emerging market investment professionals in absolute number and a female representation rate of 15 percent. See Box 1 on Chinese Private Equity and Venture Capital Sub-Saharan Africa leads non–East Asian emerging market peers with roughly 12 percent of senior 27 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL investment professionals. Other markets, including Middle East and North Africa (MENA), Latin America and the Caribbean (LAC), and South Asia, where 95 percent of senior investment professionals are based in India, appear to lag other emerging markets as well as overall developed markets. Female representation in PE/VC is, at least in part, a function of the social and cultural nuances of the markets in which these firms operate. For instance, female labor force participation in India fell from about 37 percent in 2005 to about 27 percent in 2018, which may be symptomatic of broader trends in the labor market that could reduce female participation in PE/VC.1 In either case, the gap between female representation in leadership in PE/VC and leadership in the broader market is an important contextual point to understand where PE/VC may lag other sectors. Overall, female representation in leadership positions in PE/VC in emerging markets appears to be less than half of midmarket businesses from similar regions, lagging by 17 percentage points, with the most significant gaps in ECA and MENA.2 Unsurprisingly, most of emerging market GPs do not have gender balanced senior investment teams.3 In fact, just 15 percent of Figure 5: Percent of Senior Investment Professionals Across Private Equity and Venture Capital who are Female ALL MARKETS BREAKDOWN OF EMERGING MARKETS PERCENT PERCENT 40% 38 31 29 29 29 20% 20 17 15 11 12 12 10 10 7 8 7 0% Developed Emerging China East Asia South Asia LAC ECA MENA SSA markets markets (excl. China) All industry sectors Private Equity and Venture Capital senior investment professionals Source: Aggregated private equity and venture capital firms dataset (including International Finance Corporation, RockCreek, PitchBook, Preqin, and publicly available data) Note: Senior investment professionals are defined as partners, C-Suite executives, and managing directors. Share of senior roles (chief executive officers, managing directors, chairmen and other senior decision makers) held by women in other industry sectors is sourced from Grant Thornton (2017), PE = private equity; VC = venture capital. 28 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL CHINESE PRIVATE EQUITY AND VENTURE CAPITAL Our findings on China’s outperformance Figure 6: Female Ownership Rates in Businesses across in the representation of female senior Emerging Markets investment professionals is in line with PERCENT other indicators on female leadership. For 70% instance, statistics from the World Bank 64 World Development Indicators show that 64 percent of Chinese firms have female participation in ownership, which exceeds 45 the average of economies in the next best 40 region—LAC—by more than 33 percent. 35% 33 31 See Figure 6. 23 18 The trend of strong female leadership in China holds in both GPs and portfolio companies. There are many examples of 0% female-led PE/VC firms in China, and China China East Asia South LAC ECA MENA SSA (excl. China) Asia has five of the most recent nine female- founded unicornsa since 2010. It is the only Source: World Bank WDI. economy in emerging markets that has more Note: ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa ; SSA = Sub-Saharan Africa. than one female-led unicorn. See Figure 7. Figure 7: Sample of female-led Chinese Private Equity and Venture Capital Firms and “unicorn” portfolio companies CHINESE FIRMS CHINESE “UNICORNS” Total AUM Valuation Female leader Year US$ Female founder(s) Year US$ Asia Rebecca Xu, 2005 11 billion Didi Jean Liu 2015 56 billion Alternatives Melissa Ma (Co-founders) GGV Capital Jenny Lee 2000 6 billion Tujia Melissa Yang 2011 1.5 billion (Managing Partner) Capital Today Kathy Xu 2005 1.5 billion Vip Kid Cindi Mi, 2013 1.5 billion (Founder) Jessie Chen Zhen Fund Anna Fang 2011 1.2 billion Xiaohongshu Miranda Quo 2013 1 billion (Partner, CEO) Keytone Stella Jin 2008 600 million Dt Dream Wu Jing Chaun 2015 1 billion Ventures (Founder) HAO Capital Elaine Wong 2006 600 million (Co-founder) Source: PitchBook. Note: AUM as of January 2019. AUM = assets under management; PE = private equity; VC = venture capital. 29 COPYRIGHT © 2019 OLIVER WYMAN 29 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL emerging market GPs have gender balanced senior investment teams, as shown in Figure 8, while about 68 percent of GPs are all male. Similarly, emerging markets are slightly ahead of developed markets in terms of gender balanced GPs, with significant variance across regions and investment strategies. See Figure 8, panels B–C. Figure 8: Gender Composition of Senior Teams A. EMERGING MARKET FIRMS BY GENDER DIVERSITY PERCENT 70% 68 35% 16 15 0% 0 1 All-male Male dominated Gender balanced Female dominated All-female B. GENERAL PARTNERS GENDER BALANCED C. GENERAL PARTNERS GENDER BALANCED BY GEOGRAPHY BY INVESTMENT STRATEGY PERCENT PERCENT Developed market 13 Developed market 13 Emerging market 15 Emerging market 15 East Asia 20 Venture capital 17 South Asia 13 Growth equity 15 LAC 11 Buyout 11 ECA 11 Real assets 12 MENA 8 SSA 17 0% 10% 20% 0% 10% 20% Sources: Aggregated Private Equity and Venture Capital from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa PE = private equity; SSA = Sub-Saharan Africa; VC = venture capital. 30 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL WOMEN AS RECIPIENTS OF CAPITAL Women are underrepresented as founders and leaders of companies receiving PE/VC funding. Only 7 percent of total PE/VC funding in emerging markets goes to female-led businesses, as shown in Figure 9, though women are the leading executives in 8 percent of deals. The representation of female-led businesses varies significantly across regions, with East Asia, predominantly China, 7% having the highest representation by value and count. Most other regions, however, have meaningfully higher number of deals versus value of deals, particularly South Asia and ECA. Our data suggest that the median funding received by female-led total Private Equity and Venture Capital businesses is 65 percent of the median funding received by male- funding in emerging led businesses; however, this appears to be mainly driven by larger markets goes number of deals in earlier stages. Women whose companies receive to female- funding in emerging markets are much more likely to receive it in led businesses earlier funding rounds than in later rounds. For instance, female-led businesses are nearly twice as prevalent (11 percent to 13 percent, by count) in accelerator or incubator stages, with median funding Figure 9: Percent of Capital Recipients who are Female by Geography PERCENT 10% 9 9 9 9 8 8 8 7 7 6 6 6 5% 5 5 5 Funding received by female-led 4 businesses (%) Deals to female-led 0% businesses (%) Emerging Emerging East Asia South Asia LAC ECA MENA SSA markets markets (excluding East Asia) MEDIAN FUNDING US$, THOUSANDS FEMALE LED 7,000 6,400 12,100 12,600 500 3,800 5,200 500 MALE LED 11,000 9,800 30,000 14,800 12,000 2,800 10,000 9,700 RATIO FEMALE/MALE % 65 65 40 85 5 135 50 5 Sources: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: Total number of companies analyzed is more than 5,400. ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa. 31 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL between US$10,000 and US$100,000. In growth and buyout stages, when median funding is between US$10 million and US$100 million, women represent only 7 percent of investments (by count). See Figure 10. When controlling for the stage of the investments, the gap in median funding between male and female entrepreneurs reduces significantly. The driver of the higher proportions of female-led businesses in earlier stage investments is difficult to define, because data for deals not made are unavailable. One optimistic perception expressed in the research interviews is that the higher numbers in earlier stages of funding represents a healthy pipeline of diverse entrepreneurs that has potential to translate to a more diverse mix of later stage deals in the future as the early stage companies grow and attract more capital for growth. There may be unconscious biases, however, that make it harder for female entrepreneurs to acquire higher growth funding (Kanze et al. 2017). Figure 10: Percent of Capital Recipients who are Female by Investment Stage PERCENT 15% 13 12 11 10% 8 8 8 7 7 7 7 6 5% 5 5 Funding received 4 by female-led businesses (%) Deals to female-led 0% businesses (%) Overall Accelerator/ Seed Early stage Later stage Growth Buyout incubator round VC VC equity MEDIAN FUNDING US$, THOUSANDS FEMALE LED 7,000 35 500 2,200 37,100 19,500 32,900 MALE LED 11,000 30 400 3,000 26,000 20,000 55,600 RATIO FEMALE/MALE % 65 120 130 70 140 100 60 Sources: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: Total number of companies analyzed is more than 5,400. VC = venture capital. 32 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL Our data (albeit small) suggest that female Chief Executive Officers (CEOs) were slightly less likely to secure a subsequent round of funding after the first investment, and female CEOs associated with the first round of funding were sometimes changed to or replaced by men in subsequent financing. As is shown in Figure 11, 13 percent of businesses with female CEOs in the initial round of investment received subsequent funding, compared to 17 percent for male CEOs. However, for the companies that did receive subsequent rounds of funding, there was a significant difference in the propensity of a CEO change to a male CEO, when female CEOs led the first deal. Thirty-one percent of businesses led by female CEOs in the first round of funding that received a second round of funding were replaced by a man as the leader of the deal for the company. In about half of these cases, the original female CEO did not appear to still be associated with the business or as a CEO. In the other half, the original female CEO could still be identified as a co-founder or co-CEO, but was not identified as the lead executive on the second round of funding. In any case, a change between CEO gender happened only 2 percent of the time for situations with male CEOs in the first round of funding. Though this data could suggest there may be biases that make it harder for female entrepreneurs to acquire later rounds of funding (e.g., through CEO replacement), more gender data will need to be collected through time to fully assess this hypothesis given the small sample. Figure 11: Path of Portfolio Companies Based on Gender of Company’s CEO at Time of Identified Deal MALE CEO FEMALE CEO First deal (N=4,000) First deal (N=375) 83% 17% 13% 87% No subsequent Subsequent Subsequent No subsequent liquidity round liquidity round liquidity round liquidity round 98% 2% 31% 69% CEO gender Changed to Changed to CEO gender not changed female CEO male CEO not changed Sources: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: CEO refers to Chief Executive Officer 33 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL Figure 12: Gender Composition of Senior Leadership Teams of Portfolio Companies A. PORTFOLIO COMPANIES BY GENDER DIVERSITY B. GENDER BALANCED PORTFOLIO COMPANIES BY GEOGRAPHY PERCENT PERCENT 70% 68 Emerging market 19 East Asia 19 South Asia 13 35% LAC 20 ECA 29 19 12 MENA 25 SSA 18 0% 0 1 All-male Male Gender Female All-female 0% 15% 30% dominated balanced dominated Source: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: Based on 810 portfolio companies with gender data for company leadership teams. ECA = Europe and Central Asia; EM = emerging market; LAC = Latin America; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa. In terms of the leadership of emerging market PE/VC portfolio companies, most teams are male dominated. Our analysis shows that gender balanced teams accounted for only 19 percent of all portfolio company senior leadership teams, whereas all-male and male dominated teams accounted for 68 percent and 12 percent, respectively, as shown in Figure 12, panels A and B. There is significant variance across the emerging market regions in terms of percentage of companies with gender balanced senior leadership teams, with ECA at 29 percent and South Asia at 13 percent. Overall, the representation of gender balanced senior leadership teams is slightly better than the senior investor teams making these investments (15 percent gender balanced), but still lags the emerging market average of women in senior management positions in emerging markets, which averages 28 percent. (Grant Thornton 2017).4 34 GENDER GAPS IN PRIVATE EQUITY AND VENTURE CAPITAL CHAPTER II NOTES 1 See the World Bank’s “Labor force participation rate, female (% of female population ages 15+) (modeled ILO estimate)” data, https://data.worldbank.org/indicator/SL.TLF.CACT.FE.ZS. 2 Findings based on interviews and surveys with midmarket businesses in all industry sectors in 36 economies. Emerging market average is calculated using weighted average of East Asia (China), South Asia (India), LAC (Latin America and the Caribbean), ECA (Eastern Europe and Central Asia), MENA (Middle East and North Africa), and SSA (Sub-Saharan Africa) weighted by number of senior investment professionals within each region. Note that professionals in India make up over 95 percent of South Asian senior investment professionals. 3 Gender balanced teams are those with a share of partners who are female between 30 percent and 70 percent; male dominated and female dominated teams are defined as firms with a share of partners who are female to be smaller than 30 percent and larger than 70 percent, respectively. 4 Investee companies with at least two executives identified are analyzed. Executives are defined as CEO, founder, C-Suite, managing director, president, and chairman. 5 Proportion of senior roles (C-Suite, managing directors, and partners) held by women sourced from Thornton (2017). Findings based on interviews and surveys with midmarket businesses in all industry sectors in 35 countries. Emerging market average is calculated using weighted average of East Asia (China), South Asia (India), LAC (Latin America and the Caribbean), ECA (Eastern Europe and Central Asia), MENA (Middle East and North Africa), and SSA (Sub-Saharan Africa) weighted by number of senior investment professionals within each region. Note that professionals in India make up over 95 percent of South Asian senior investment professionals. 35 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE III. RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Chapter 3 explores the second question of our There are several nondiversity variables, such as vintage, research: are there benefits of moving toward gender geography, investment strategy, and fund size, that balance in leadership of GPs and portfolio companies? could explain differences in net IRR and TVPI outside We use data from more than 700 PE/VC funds and 500 of diversity. We control for many of these variables portfolio companies to assess correlations between by normalizing all performance data against a peer gender balanced leadership and performance, while benchmark, which is in-line with industry practice. The using peer benchmarks to control for nondiversity peer benchmark is the median performance of funds variables (e.g., fund vintage and geographic focus). that are invested in similar vintages, geographies, and strategy types. We develop a view of “excess returns” Our findings suggest that there is a positive correlation (the difference between a fund’s return and the between the gender diversity levels of GPs and portfolio returns of its peers) to analyze the correlation between companies and their performance. The median gender diversity and performance.2 Using excess returns as balanced fund outperformed median unbalanced our dependent variable reduces the chances that any peers by as much as 20 percent in annual returns. Our performance differences between gender balanced and research suggests this is primarily driven by enhanced male or female dominated funds is driven by factors investment decision making and expanded deal outside of the gender mix of decision-making teams. We sourcing through broader entrepreneurial networks. used the median performance of gender balanced and For instance, female investment partners have more male or female dominated funds to minimize the effect than 70 percent more female-led businesses in their of outliers. Finally, we test the impact that including portfolios than male partners. Portfolio companies with a variable for fund size would have on the correlation gender balanced leadership teams have outperformed between gender balance and fund performance. unbalanced peers in median valuation increases by as much as 25 percent. Thus gender balanced GPs can Our analysis of emerging market PE/VC funds suggests take advantage of tendencies for people to maintain that there is a positive correlation between gender relationships with others who are similar to themselves, balanced senior investment teams in GPs and and invest in gender balanced. performance of their funds. Though this positive correlation holds when using standard control variables, including vintage, geography, and investment GENDER BALANCED strategy, we do not establish a causal relationship between greater diversity and higher returns. This FUND PERFORMANCE relationship also holds when controlling for fund size. Controlling for fund size does not significantly affect A key piece of our research was assessing the the correlation between gender balance and fund correlation—positive, negative, or null—between gender performance because gender balance and fund size are balance and fund performance in emerging markets. minimally correlated with each other. More details of our Our analysis uses net internal rate of return (IRR) and methodology, the uncertainty of our estimate and the total value to paid-in (TVPI) multiples as our measures impact of fund size can be found in Appendix A . for performance, which are two of the most common metrics in the PE / VC industry.1 36 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE For excess net IRR, we find that funds managed by gender balanced investment teams have a median excess IRR of 1.7 percent, while funds led by male or female dominated teams have a median excess net IRR of -0.1 percent.3 See Figure 13 panels A–B. When normalized for the median net IRR of emerging market funds, which is approximately 8 percent, performance for funds of gender balanced teams is approximately 20 percent higher than funds of male or female dominated teams.4 Funds managed by gender balanced teams outperformed male 20% or female dominated teams across emerging market geographies and investment strategies. This includes venture capital—in which investments are typically focused on the technology industry—which tends to have a lower incidence of female participation than female higher returns labor participation in the overall market (UKCES 2015). Across from funds investment strategies, for instance, median excess returns have managed by gender been higher in VC (more than 4.5 percentage points), growth equity balanced versus and buyout (more than 1.6 percentage points) and real assets (more male or female than 1.3 percentage points) funds. See Figure 14 panels A-C. Across dominated teams Figure 13: Performance of Emerging Market Funds, Excess Net IRR to Relevant Benchmark given Vintage, Geography and Strategy A.BY GENDER DIVERSITY GROUP B. GENDER BALANCED VS. MALE OR FEMALE DOMINATED PERCENT PERCENT 1.7 1.67 0.4 Small +1.7 pp sample size 0.1 -0.05 FEMALE % <10 10 30 30 70 >70 Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) Source: Aggregated private equity and venture capital firms dataset (including International Finance Corporation, RockCreek, PitchBook, Preqin, and publicly available data). Note: Median excess net IRR is relative to vintage, strategy, and geography benchmarks. Total number of emerging market funds with performance and gender data analyzed was 591. This includes 46 gender balanced firms. 424 firms had less than 10 percent of female senior investment professionals, 112 between 10 percent to 30 percent, and 9 with more than 70 percent female senior investment professionals. The difference is 1.7 percentage points between unrounded numbers for funds managed by male or female dominated and gender balanced teams. IRR = internal rate of return. 37 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE geographies, median excess returns were highest in East Asia (more than 2.0 percentage points), but held true for the other emerging markets (more than 1.3 percentage points). See Figure 15 panels A–B. Our analysis of TVPI multiples, which do not account for the time value of money, also showed that the median fund managed by gender balanced teams outperformed the median fund managed by male or female dominated teams. Funds managed by gender balanced investment teams had a median excess TVPI of 0.17x, while funds led by male or female dominated teams had a median excess TVPI of -0.01x. When normalized for the median TVPI of analyzed emerging market funds, which is approximately 1.37x, performance for funds of gender balanced teams was approximately 13 percent Figure 14: Performance of Emerging Market Funds by Strategy, Excess Net IRR to Relevant Benchmark given Vintage, Geography and Strategy A. VENTURE CAPITAL FUNDS B. GROWTH EQUITY AND BUYOUT FUNDS C. REAL ASSETS FUNDS Average 41percent increase relative to Average 20 percent increase relative to Average16 percent increase relative to median Emerging Market Venture Capital median Emerging Market Growth Equity median Emerging Market Real Assets returns (11%) & Buyout returns (8%) returns (8%) PERCENT PERCENT PERCENT 3.9 1.6 +4.5 pp 1.3 +1.6 pp +1.3 pp 0 0 0.6 Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) Source: Aggregated private equity and venture capital firms dataset (including International Finance Corporation, RockCreek, PitchBook, Preqin, and publicly available data). Note: Median excess net IRR is relative to vintage, strategy, and geography benchmarks, by strategy. Total number of emerging market funds with performance and gender data analyzed was 591. Out of that total, 85 funds were VC, of which 13 were gender balanced; 396 were growth equity or buyout, of which 23 were gender balanced; and 110 were real assets funds, of which 10 were gender balanced. EM = emerging market; IRR = internal rate of return. 38 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Figure 15: Performance of Emerging Market Funds by Geography, Excess Net IRR to Relevant Benchmark given Vintage, Geography and Strategy A. EAST ASIA FUNDS B. REST OF EMERGING MARKETS FUNDS Average 18 Percent increase relative to median Emerging Markets Average19 Percent increase relative to median Emerging Markets East Asia returns (11%) Rest of Emerging Markets returns (7%) PERCENT PERCENT 1.9 1.3 +2.0 pp +1.3 pp -0.1 0 Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) S Source: Aggregated Private Equity and Venture Capital data sets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets Note: Median excess net IRR relative to vintage, strategy, and geography benchmarks, by geography. Total number of emerging market funds with performance and gender data analyzed was 591. Of that total, 229 were East Asia, of which 22 were gender balanced; 362 funds were “rest of emerging markets,” of which 24 were gender balanced. EM = emerging market; IRR = internal rate of return. higher than funds of male or female dominated teams.See Figure 16 panels A–B. Funds managed by gender balanced teams outperformed male or female dominated teams across emerging market geographies and investment strategies in terms of TVPI multiples as well. Across investment strategies, for instance, median excess returns were higher in Venture Capital (more than 0.20x), Growth Equity and Buyout (more than 0.18x) and Real Assets (more than 0.15x) funds. See Figure 17 panels A–C. Across geographies, median excess returns were higher in East Asia (more than 0.26x) and Rest of Emerging Markets (more than 0.05x). See Figure 18 panels A–B. 39 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Figure 16: Performance of Emerging Market Funds, Excess Net TVPI to Relevant Benchmark given Vintage, Geography and Strategy A. BY GENDER DIVERSITY GROUP B. GENDER BALANCED VS. MALE OR FEMALE DOMINATED PERCENT PERCENT 0.17x 0.17x Small +0.18x sample 0.01x size -0.01x 0.03x FEMALE % <10 10–30 30–70 >70 Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) Source: Aggregated private equity and venture capital firms dataset (including International Finance Corporation, RockCreek, PitchBook, Preqin, and publicly available data). Note: Median excess net TVPI is relative to vintage, strategy, and geography benchmarks. Total number of emerging market funds with performance and gender data analyzed was 591. This includes 46 gender balanced firms. Of 591, 424 had less than 10 percent of female senior investment professionals, 112 between 10 percent to 30 percent, and 9 with more than 70 percent female senior investment professionals. The difference is 0.18 times between unrounded numbers for funds managed by male or female dominated and gender balanced teams. TVPI = total value to paid-inS.our. Figure 17: Performance of Emerging Market Funds by Strategy, Excess Net TVPI to Relevant Benchmark given Vintage, Geography and Strategy A. VENTURE CAPITAL FUNDS B. GROWTH EQUITY AND BUYOUT FUNDS C. REAL ASSETS FUNDS Average 13 Percent increase relative to Average13 Percent increase relative to Average 12 Percent increase relative to median Emerging Markets Venture Capital median Emerging Markets Growth Equity median Emerging Markets Real Assets returns (1.52) and Buyout returns (1.34) returns (1.28) PERCENT PERCENT PERCENT 0.17x 0.17x 0.14x +0.20x +0.18x +0.15x 0.01x 0.01x 0.03x Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) Source: Aggregated private equity and venture capital firms dataset (including International Finance Corporation, RockCreek, PitchBook, Preqin, and publicly available data). Note: Median excess net TVPI is relative to vintage, strategy and geography benchmarks, by strategy. Total number of emerging market funds with performance and gender data analyzed was 591. Of the total, 85 funds were venture capital, of which 13 were gender balanced; 396 were growth equity or buyout, of which 23 were gender balanced; and 110 were real assets funds, of which 10 were gender balanced. EM = emerging market; TVPI = total value to paid-in. 40 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Figure 18: Performance of Emerging Market Funds by Geography, Excess Net TVPI to Relevant Benchmark given Vintage, Geography and Strategy A. EAST ASIA FUNDS B. REST OF EM FUNDS Average18 Percent increase relative to median Emerging Markets Average 4 Percent increase relative to median Emerging East Asia returns (1.41) Markets Rest of Emerging Markets returns (1.26x) PERCENT PERCENT 0.27x +0.26x 0.02x 0.0x1 +0.05x -0.03x Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) Source: International Finance Corporation (IFC) Gender Diversity in Private Equity and Venture Capital Survey, 2018. Note: Median excess net TVPI is relative to vintage, strategy, and geography benchmarks, by geography. Total number of emerging market funds with performance and gender data analyzed was 591. Of the total, 229 were East Asia, of which 22 were gender balanced; 362 funds were “rest of emerging markets,” of which 24 were gender balanced. EM = emerging market; TVPI = total value to paid-in. 41 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE CASE STUDY DEVELOPMENT PARTNERS INTERNATIONAL The impact of gender balance on decision-making and performance Development Partners International (DPI) is a leading 45 percent of the firm is female, including 50 percent of pan-African PE/VC firm that focuses on buyout and partners and 50 percent of the investment committee. growth equity investing. It was co-founded in 2007 by Miles Morland and Runa Alam. The firm currently With its track record of success in investing in manages approximately US$1.1 billion in assets, Africa, DPI is a gender balanced investment firm has more than 35 employees, and has invested in demonstrating performance. Its first fund, African 20 companies. DPI is an example of how gender Development Partners I, a vintage 2008 fund, closed diversity can change the way firms make decisions and at approximately US$400 million and is a Cambridge how performance benefits can be obtained through Associates top quartile fund. The fund invested in nine gender balanced investment teams. portfolio companies, of which two had initial public offerings (IPOs) on the Algiers and Johannesburg Beginning with a gender balanced mix of partners Stock Exchanges, one was acquired by a publicly and other investment professionals, the firm views traded company, and several were exited through everything through a diverse filter. DPI believes that its private market transactions. With momentum from diversity changes how the firm—from top to bottom— this success, DPI’s second fund, African Development perceives all decisions, from hiring to investments. For Partners II, closed in 2013 at US$725 million, more instance, as a firm builds from a diversity of experiences than an 80 percent increase from its original fund and and backgrounds, its hiring decisions more greatly reflect oversubscribed by 45 percent. ADP II has invested in the value that unique perspectives and experiences 13 companies, including two companies whose primary would bring to the firm. This collectively diverse consumer base are emerging middle-class women. perspective permeates throughout the firm’s culture and affects how everyone—women and men—make decisions. This filter has enabled the DPI to naturally build a gender balanced firm as it has grown: now, 42 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE BENEFITS OF gender balance would improve returns, nearly 50 percent of these respondents still believe that increasing gender GENDER BALANCED diversity would yield benefits in investment decision GENERAL PARTNERS making, talent management, operations and investor relations, and deal sourcing.1 Thus, about half of respondents who are skeptical of benefits to returns still Through interviews and surveys, we explored potential believe there are benefits to increasing gender diversity underlying drivers of the observed outperformance of in senior investment teams. the funds of gender balanced firms and practitioners’ perception of the relationship between gender balance In addition, survey respondents and interviewees and performance. The view of the relationship between highlight several other benefits of moving toward gender diversity and performance and its drivers varies gender balance, including enhanced investor relations across GPs by gender and their market. For instance, and talent management. See Figure 20. Our research female respondents are about 60 percent more likely suggests that firms could become competitively to believe in a positive relationship compared to male disadvantaged if they do not have diverse investment respondents, while developed market respondents are teams. The emerging market GP survey respondents about 25 percent more likely to believe in the positive who believe in the positive relationship between gender relationship compared to emerging market respondents. diversity and performance expect increased diversity See Figure 19. to have several benefits: 58 percent expect enhanced talent management, operations, and investor relations; Though about half of emerging market survey 87 percent expect improved investment decision respondents state they do not believe moving toward making; and 60 percent expect improved deal sourcing. Figure 19: Percent of General Partners who Believe that Increased Gender Diversity would Improve Performance PERCENT 80% 71 61 54 49 44 40% 0% Overall Male Female Emerging Developed market market Source: International Finance Corporation (IFC) Gender Diversity in Private Equity and Venture Capital Survey, 2018. Note: Data reflect percentage of General Partners who believe in a positive relationship between greater gender diversity of senior investment professionals and investment returns. Includes 460 General Partner respondents. 43 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Enhanced Talent Management, Operations, and Investor Relations Surveyed industry practitioners believe that increased gender diversity could yield improved governance, better risk management, and greater retention of both male and female employees. The positive impact of gender balance on governance and risk management, as well as the potential impact this could have on financial performance, is supported by other research. This research includes studies that have found statistically significant correlations between higher shares of women on boards and greater stability within banks (Sahay, Čihák, and IMF Staff 2018). Additionally, other research has found that moving toward gender balance in board 65% members and leadership teams would contribute to stronger environmental, social and governance (ESG) performance. This, in turn, would be expected to lead to better business performance (Di Miceli and Donaggio 2018). of Limited Partners view gender diversity in General Partners as important Figure 20: Emerging Markets General Partners’ View on Benefits of Gender Diversity PERCENT 100% 87 60 58 50% 0% Improved investment Improved deal Enhanced talent decision making sourcing management, via expanded operations, and investor networks relations Source: International Finance Corporation (IFC) Gender Diversity in Private Equity and Venture Capital Survey, 2018. Note: Data reflect percentage of General Partners who believe in a positive relationship between gender diversity and performance and who believe in the following benefits (shown in bars). Includes responses from 83 emerging market partner level General Partner respondents who buy into the positive relationship between gender diversity and performance. Enhanced talent management, operations, and investor relations benefits include: better risk management, improved governance, improved investor relations, and greater employee retention of both male and female candidates. 44 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Figure 21: Emerging Markets General Partners’ View on Additional Benefits of Gender Diversity PERCENT 100% 65 58 55 55 50% 0% Greater employee Improved investor Improved Better risk retention relations governance management Source: International Finance Corporation (IFC) Gender Diversity in Private Equity and Venture Capital Survey, 2018. Note: Data reflect percentage of General Partners who believe in a positive relationship between gender diversity and performance. Improved gender diversity could also be used as a balance would give firms differentiated access to means of differentiation for PE/VC firms seeking to female-led and gender diverse teams. Gender diverse raise funds in emerging markets. Surveyed LPs largely investments team would gain the following: view gender diversity in a firm’s investment team as important. About 65 percent of the LPs surveyed state Expanded deal flow. Gender diverse investment teams they view gender diversity in GPs firms’ investment are more likely to have access to female entrepreneurs team as important, very important, or a top priority through their existing networks, which about 60 percent when committing capital to funds. LPs in PE/VC of surveyed industry practitioners believe would be a increasingly are seeking to invest in companies with benefit of greater gender diversity. Research suggests more gender diverse leadership see Figure 21, which that networks naturally develop between people of similar is in part demonstrated by the Institutional Limited genders, ethnicities, and backgrounds (McPherson, Partners Association’s recent move to include questions Smith-Lovin, and Cook 2001). As such, the proportion on diversity in its due diligence questionnaire (DDQ). of women in female networks tends to be much higher than in male networks. Thus, increasing representation of dissimilar senior investment professionals, including Improved Investment Decision Making, of gender diverse backgrounds, likely would expand the Deal Sourcing, and Closing scope of the investment firm’s network. Our research suggests that gender diverse investment Expanded networks will increase the scope of the deal teams are more likely to have female entrepreneurs in funnel because emerging market deal sourcing is their networks, will be better able to assess business largely network based. Ninety-four percent of surveyed models, and will be more competitive in attracting top emerging market GPs state that professional networks are female entrepreneurs. Thus, moving toward gender an important source for deal flow, which is nearly twice as 45 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Figure 22: Limited Partners’ View on Importance of General Partners’ Gender Diversity PERCENT 40% 40 20% 20 16 16 8 0% Not important Somewhat Important Very Top priority important important Source: International Finance Corporation (IFC) Gender Diversity in Private Equity and Venture Capital Survey, 2018. Note: Data reflect percentage of Limited Partners by their view on how important gender diversity in General Partners investment teams is when committing capital to funds. Based on a sample of 25 Limited Partners survey respondents. high as the next most important source. Thus, gender diverse teams will likely have a wider set of prospective deals that enter the deal funnel, because they would access both male and female driven sourcing networks. Better ability to assess business models. Our findings suggest that gender balanced teams will be better at separating “good from great,” particularly for businesses that are serving female consumers. Greater gender diversity is expected to improve investment decision making. Though gender diversity is only one variable to be considered in diversity of thought, the relationship between increased diversity and improved decision making is well-documented in existing literature. Greater diversity would be expected to help investment teams avoid group think, reducing bias in investment decision-making processes. More diverse teams encourage team members to become more aware of their ways of thinking and question their assumptions, which in turn helps them better process information and avoid making errors in decision-making processes (Rock and Grant 2016). 46 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Research suggests that investors may be less likely to connect to the “Venture capital requires assessing sectors that female entrepreneurs serve and are reluctant to invest entirely new business models in businesses that serve consumers or address gaps in markets they don’t understand (Morgan Stanley 2018). Interviews of industry against underserved markets. You practitioners support this view, identifying several examples in which need to understand the market’s business models that primarily cater to female consumers may have consumers to successfully disrupt it, been undervalued or underappreciated by male senior investment and you’ll only partially understand professionals, who do not fully understand the market appeal. consumers’ perspective if you Male dominated teams, thus, may discount the upside of such don’t have diverse teams.” companies that may present good business opportunities. Women drive 70 percent to 80 percent of all consumer purchasing, through YEMI LALUDE a combination of buying power and influence, and promising MANAGING PARTNER, businesses that are inclusive of or focused on the women’s AFRICA AT TPG GROWTH consumer market segment can be a growth opportunity for investors (Brennan 2018). Thus, gender balanced teams will likely be better able to assess the opportunity of businesses that appeal to female consumers. Higher likelihood of appealing to top female or gender diverse businesses. Unconscious biases generally mean that people, all else being equal, are naturally inclined toward working with people from similar backgrounds. This natural pull toward homophily has been documented consistently in investment and noninvestment research. In investments, researchers from Harvard Business School, Harvard University, and the University of Illinois at Urbana- Champagne have found strong evidence of homophilic selection in collaboration across pairs who possess similar characteristics and backgrounds. For instance, they have found the probability of collaboration between two venture capitalists increases by 39.2 percent if they are of the same ethnicity (Gompers, Mukharlyamov, and Xuan 2014). Existing analyses support the positive relationship between the diversity of GPs and portfolio companies. Analysis in developed markets suggests that female investors are more likely to invest in management teams that include women. A study of U.S. venture capital markets has found that VC firms with women partners are more than twice as likely to invest in gender diverse management teams and more than three times more likely to invest in companies with female CEOs (Brush et al. 2014). A separate study by Credit Suisse analyzed the average percentage of funding rounds that went to companies launched by female entrepreneurs. It has 47 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE found that, out of 410 VC firms, partner teams with at least one female are one-and-a-half times more likely to invest in female- led businesses (Dawson, Kersley, and Natella 2016). Similar research from the Harvard Business School has found that “having a female partner is strongly correlated with the investment into companies with a female entrepreneur,” which supports the idea of strong gender-based homophily between senior investment professionals and potential portfolio company founders (Gompers and Wang 2017). Our analysis of emerging market GPs and portfolio companies yields a similarly positive relationship between diversity of investment partners and that of portfolio company CEOs. Though the sample of deals with a female partner and deals involving a female CEO are limited, our dataset shows that listed female deal partners have about 70 percent more investments in companies with female CEOs than male deal partners. This is shown in Figure 23. The data suggest a positive relationship between women as allocators of capital and women as recipients of capital. For PE/VC firms, this could mean that improving the gender diversity of senior investment professionals could help arrive at a more diverse investment portfolio. For the industry, this could mean that the proportion of female-led businesses receiving capital could increase as the representation of women in leading investment roles improves. Figure 23:Percent of Deals with Female CEO by Deal Partner Gender PERCENT 12 +5pp 7 Female deal partners Male deal partners Source: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: Data reflect percentage of investments going to female-led businesses by gender of deal partner. Based on total sample of about 1,900 deals with CEO and lead partner gender data. 48 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE CASE STUDY LIGHTSPEED VENTURE PARTNERS The virtuous cycle of diversity in investors yielding access to diverse investees Lightspeed Venture Partners is a global venture capital consumer facing investments have a female founder, firm based in Silicon Valley focused on consumer and which is significantly higher than developed (7%) and enterprise investing. The firm manages over US$6 billion emerging market (10%) averages of the proportion of in capital and has made over 350 investments across B2C investments that are female-founded. the China, India, Israel and United States, including companies such as GIPHY, GOOP, Grab, The Honest Furthermore, Lightspeed found that increasing gender Company, MuleSoft, Nest and Snap Inc. Lightspeed has diversity of its senior investment team led to greater exited over 125 companies through IPOs and acquisitions. diversity in its portfolio companies. The firm has added multiple diverse individuals to the team in recent years. Lightspeed sees female founders as a differentiated In 2015, about 29% of Lightspeed’s consumer portfolio opportunity in the consumer space. One of the firm’s was in female founded companies, which increased investment theses is that consumer technology is driven to 35% after the team added its first of five female by popular culture. Popular culture is often led by women, investment partners. This step change was driven in who are early adopters. Consumer facing businesses are part by the fact that the new partners disproportionately some of the most significant private equity and venture sourced and invested in female founded companies—as capital investments in emerging markets (~24%, second much as 65% of her investments were in female-led only to technology at ~30%), and as much as 70% of businesses—which increased the portfolio’s aggregate consumer purchasing is driven by women. diversity levels. Since 2012, Lightspeed has invested more than The firm’s experience underscores that different US$178 million in female-founded companies, many of networks may lead to skews in deal sourcing, and which are consumer facing. Its investments in female the benefit that moving toward balance could have founded consumer companies include: Stitch Fix, which on sourcing, understanding, and closing investment exited through IPO on the NASDAQ, GOOP, The Honest opportunities in a diverse set of businesses. Company and Girlboss. More than one-third of their “The differentiating factor in the consumer space is pop culture insights, not technology. Women are early adopters and female entrepreneurs understand their needs. Having female investors means it is more likely that those entrepreneurs will already be in our networks, someone from our firm will be able to connect with them, and the entrepreneur will want to partner with us.” JEREMY LIEW, PARTNER, LIGHTSPEED VENTURE PARTNERS 49 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE GENDER BALANCED rates (CAGRs) between the two valuation points, because the time required to achieve valuation changes PORTFOLIO COMPANY is a relevant consideration. For instance, a 50 percent PERFORMANCE valuation increase in one year would be a more desirable investment than a similar change over 10 years. When looking at CAGRs, portfolio companies with gender Our analysis of the gender diversity of senior leaders and balanced leadership teams outperformed companies with the performance of portfolio companies suggests that leadership teams between 10 percent and 30 percent more diverse leadership in portfolio companies could be women by 1 percentage point and teams with less than positively associated with higher returns. The analysis 10 percent of women by 7 percentage points. These results has focused on the increase in valuation, or the step-up are shown in Figure 24, panels A–B. valuation 2, of PE/VC invested companies between two rounds of liquidity in which the second round was either We also considered performance in the context of a follow-on round or an exit. Portfolio companies with the geography and vintage of the deal, because gender balanced leadership teams had a 1.64 times performance is expected to be correlated with broader increase in their step-up valuations, which is 5 percentage macroeconomic trends that might be time- and country- points higher than leadership teams with between specific. The analysis shows that the outperformance 10 percent and 30 percent women, and 13 percentage of gender balanced leadership teams holds when points higher than leadership teams with less than annualizing the growth in valuations and benchmarking 10 percent women. against peer portfolio companies based on investment year and geography. Gender balanced senior leadership We removed the impact of different holding periods of teams outperform male or female dominated teams investments by looking at compound annual growth by 5.5 percentage points per year in valuation Figure 24: Valuation Change of Portfolio Company by Gender Composition of Senior Leadership Team A. STEP UP VALUATION UNANNUALIZED B. ANNUALIZED VALUE APPRECIATION CAGR PERCENT PERCENT 23 24 1.64x 1.59x 17 1.51x Small Small sample sample size size FEMALE % <10 10–30 30–70 >70 <10 10–30 30–70 >70 Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) Source: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: Data reflect median valuation increase by firm diversity level. This analysis is based on a sample of 512 portfolio companies with at least two rounds of funding with valuations and gender data of leadership teams. CAGR = compounded annualized growth rates. 50 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Figure 25: Annualized Valuation Change of Portfolio Companies Relative to Benchmarks given Year of Investment and Geography A. BY GENDER DIVERSITY GROUP B. GENDER BALANCED VS. MALE/FEMALE DOMINATED PERCENT PERCENT 5.4 5.4 Small sample +5.5 pp size 0 -0.3 -0.1 FEMALE % <10 10–30 30–70 >70 Male or female dominated Gender balanced (Percent of female < 30% or > 70%) (Percent of female between 30%–70%) Sources: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: Data reflect median excess annualized valuation increase relative to geography and investment year peers by gender diversity level. This is based on a sample of 414 portfolio companies with at least two rounds of funding with valuations, gender data of leadership teams, and a sufficient number of peers to define a performance benchmark. increase when compared to benchmarks. When normalizing the 5.5 percentage point gain by the median CAGR of emerging market portfolio companies (approximately 22 percent), this represents approximately a 25 percent performance increase. These results are shown in Figure 25, panels A–B. BENEFITS OF GENDER BALANCED PORTFOLIO COMPANIES Fifty-six percent of emerging market GPs believe increasing gender balance in portfolio companies would increase investment returns. Of this majority, most surveyed senior investment professionals believe that increasing the gender diversity of portfolio companies’ senior management teams would improve their decision making; allow them to serve a more diverse customer base; and enhance governance, operations, or relations management (including better risk management, improved governance, and greater employee retention). See Figure 26. 51 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE Figure 26: General Partners’ View on Benefits of Gender Diversity in Portfolio Companies PERCENT 100% 87 61 60 50% 43 0% Improved Enhanced governance, Ability to serve Access to more decision making operations, or more diverse resources and wider relations management customer base industry knowledge Source: IFC Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Governance, operations, or relations management benefits include better risk management, improved governance, improved investor relations, and greater employee retention of both male and female candidates. Based on responses from 91 emerging market GPs who believe that increasing gender diversity in the senior leadership teams of portfolio companies would improve returns. Our findings suggest that there is a positive correlation between gender balance in leadership and performance for GPs and portfolio companies. For GPs, this correlation could be explained by enhanced investment decision making afforded by diversity of thought and expanded deal sourcing through broader entrepreneurial networks. For portfolio companies, this correlation could be explained by improved decision making, enhanced governance and operations, and a better ability to serve a diverse customer base. The next chapter outlines steps that both GPs and LPs can take to move GP investment teams and portfolio company leadership teams toward gender balance to potentially reap these benefits. 52 THE RELATIONSHIP BETWEEN GENDER BALANCE AND PERFORMANCE CHAPTER III NOTES 1 Net IRR is a measure of an investment’s rate of return. In PE/VC investments, it is the discounted rate of return of cash flows to and from investors after accounting for management fees. Net total value to paid-in (TVPI) capital multiples are the summation of distributions from the fund and residual values (unrealized value of the fund’s net assets) divided by the total capital commitment. It is not time adjusted. 2 For example, the average fund in “China–2011–Venture Capital” could have had a net IRR of 12 percent, while the average fund in “LAC–2011–Venture Capital” could have had a net IRR of 8 percent. All 2011 Chinese focused VC funds would have 12 percent subtracted from their net IRR to adjust for the average performance of similar funds while a similar LAC fund would be adjusted by subtracting 8 percent. Thus, a Chinese fund with a net IRR of 15 percent would have an excess net IRR of 3 percent, while a LAC fund with a net IRR of 15 percent would have an excess net IRR of 7 percent. 3 Excess internal rate of return is the difference between the IRR of an individual fund and the IRR of that fund’s benchmark net IRR, which is based on vintage, geography, and investment strategy. The excess return of the full population is 0. 4 Twenty percent was calculated using 1.7 percentage point difference between gender balanced and male or female dominated teams divided by 8.1 percent, which is the median net IRR of all analyzed funds. This transformation was done to contextualize the performance uplift in terms of absolute returns, while still retaining the benefits of a benchmark methodology that controls for nondiversity variables. 5 We calculated 15 percent using 0.18 times difference between gender balanced and male or female dominated teams divided by 1.37 percent, which is the median TVPI of all of the funds analyzed. This transformation was done to contextualize the performance uplift in terms of absolute returns, while still retaining the benefits of a benchmark methodology that controls for nondiversity variables. 6 Forty-six percent of respondents who do not buy in to business case believe in improved decision making; 49 percent believe in enhanced talent management, operations, and investor relations; 46 percent believe in improved deal sourcing. 7 Step-up valuations are the company’s change in valuation between two rounds of liquidity. Step-up valuations are used as our primary metric, because valuations at various rounds of funding are available for more companies than other performance metrics, including IRR, revenue growth, or earnings before interest, tax, depreciation, and amortization (EBITDA) growth. 53 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE IV. STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Chapter 4 explores the final question of our research: drivers of the low representation of female senior what can be done to move toward gender balance in investment professionals. Men believe external factors, leadership in GPs and portfolio companies? We use data such as difficulty finding qualified female talent from over 500 survey respondents and semistructured and a lack of female interest in private equity (PE), interviews of more than 50 industry practitioners and rather than internal factors, such as biased recruiting experts to identify the most significant barriers to practices and a lack of firm prioritization, are nearly gender balance and effective steps that can be taken twice as significant of drivers. Women, however, ranked to overcome them. To understand the lack of gender external factors as the least significant drivers and were balance in senior leadership in GPs and portfolio over two times more likely to attribute responsibility to companies, the research is structured along two funnels: internal than external factors. See Figure 27, panels A (a) the talent pipeline, which focuses on how GPs hire, and B. retain, and promote investment talent; and (b) the investment pipeline, which focuses on how GPs source, Our research suggests that while external factors may evaluate, and oversee investment opportunities and contribute in part to the low representation of women portfolio companies. See Figure 4 in Chapter I. in senior investment roles, significant internal factors are driving these outcomes. When diagnosing barriers The following subsections explore what GPs and LPs can of the industry’s gender gap in investment leadership, do to move toward gender balance through time. GPs, findings from interviews and surveys pointed to four which have direct control over policies and initiatives similar themes in GPs: undertaken in both pipelines, are the subject of the 1. Improving gender diversity is not prioritized by first two subsections. LPs, which can influence these GPs’ senior leaders, resulting in organizational policies and initiatives within GPs with which they have cultures that are not sufficiently inclusive or driven relationships, are the subjects of the third and final to make change subsections. 2. Recruiting practices, which heavily rely on networks and talent pools that are not gender diverse, reduce the amount of qualified female talent GENERAL PARTNERS— 3. Current approaches to flexible work policies create MANAGING THE TALENT a forced choice between career and family, both when women are considering having children and PIPELINE returning from leave 4. The combined lack of senior female representation Surveyed men and women in emerging markets have and formal sponsorship programs reduce sponsorship significantly different views on the most important opportunities for junior female employees 54 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Figure 27: General Partners’ View on Drivers of Low Gender Diversity A. EXTERNAL AND INTERNAL FACTORS B. MALE AND FEMALE RESPONSES PERCENT PERCENT Average of external factors 31 38 15 Difficulty finding 42 52 qualified female talent 21 Low female interest 36 46 in private equity 14 Local norms reduce 15 18 women leadership 11 Average of internal factors 28 23 39 Lack of firm prioritization 35 29 47 Biases in recruiting 33 26 and hiring 48 Issues in retention 22 19 29 Female Male Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Data reflect survey respondents’ view on most significant factors that explain the low proportion of female senior investment professionals, overall and by gender, in emerging markets. Based on 240 emerging market General Partner respondents. BARRIER 1: LIMITED COMMITMENT AT THE TOP AND “Senior leaders positioning EXPLICIT GOALS BY GENERAL PARTNERS diversity as a priority to improve firm performance can set the tone Current State for the rest of the organization, but it has to be backed up with Our survey results suggest that although 68 percent of surveyed firm leaders state they believe that achieving gender balance is concrete action. For example, by important, only 39 percent of junior women in the pipeline believe publicly setting targets and goals.” their firms are making improved gender diversity a significant priority. About 75 percent of junior women believe that women HENRIETTE KOLB are disadvantaged in their path to partner, which is a 38 percentage MANAGER, IFC GENDER SECRETARIAT point difference relative to junior men. In addition, interviewees nearly universally suggest that firms are generally open to improving gender diversity within their investment teams, but they are not taking the required action to make significant change. See Figure 28. The lack of concrete action to add credibility to this priority may contribute to the disconnect between partners and junior employees. Overall, only 45 percent of emerging market firms have a strategy or targets related to improving gender diversity. Even if 55 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE “Senior leaders need to believe Figure 28: Percent of General Partner Employees who Believe Increasing Gender Diversity is a Firm Priority in improving gender diversity PERCENT wholeheartedly, or else it’s just 100% being ‘politically correct.’ If it’s not coming from the top, then it will 68 fizzle out.” 66 CATHERINE LEUNG 50% CO-FOUNDER AND GENERAL PARTNER, 39 MIZMAA VENTURES 0% Firm leaders Junior male Junior female employees employees Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Data reflect share of firm leaders and junior employees who believe improving gender diversity is firm priority, by gender. Based on responses from 157 General Partner firm leaders in emerging markets and 71 employees that are not partners in emerging markets. the firm leaders believe improving gender diversity were important, about 55 percent have such a strategy or targets related to gender diversity. It is unlikely that firms will make significant progress in improving gender diversity without the plans, goals, or metrics to drive and measure progress. Of firms that have an existing strategy or targets, the targets typically apply only to interview invitations and do not flow through to offers made or promotion rates. Fifty- two percent of surveyed emerging market firms have established gender diversity targets for interview invitations, compared to only 43 percent for offers made and 19 percent for promotion rates. See Figure 29. Implications on Talent Management Culture is an essential component to any organization. Organizational culture encompasses the assumptions, beliefs and values that underlie nearly all actions within an organization. Given the male dominant status quo, firms whose culture is not explicitly gender inclusive are unlikely to see significant change and may deter women from being interested in joining private equity firms. 56 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE “Tone at the top to affect change is Figure 29: Types of Gender Diversity Targets PERCENT a truism. Gender diversity will not 100% improve unless there is tangible commitment from the most senior leaders. They have to ensure that this permeates through decisions 52 50% in hiring, promotion, mentorship 43 and sponsorship.” RUNA ALAM 19 CO-FOUNDER AND CEO, DPI 0% Interview invitations Offers made Promotion rates Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses of 57 emerging market General Partners with a strategy or targets for improving gender diversity at each stage The right tone at the top is a prerequisite to establishing a supportive culture, as it permeates throughout organizations and greatly affects the way people engage with one another. Tone at the top is how firm leaders can demonstrate organizational values. These priorities can be articulated through policies, organizational goals, and the development of reward systems that incentivize certain behavior. This prioritization flows through to everyday actions. For instance, hiring managers may only feel comfortable waiting two weeks to interview for a vacant leadership (e.g., Vice President) role until the pool of candidates is sufficiently diverse if they know the firm views achieving gender balance as a priority. Finally, creating a culture that values gender diversity could be a prerequisite to seeing its benefits. Recent findings from a research team including a Harvard Business School professor suggest that the impact of gender diversity on organizations may be context dependent and could create “a self-fulfilling cycle.” Organizations, industries, and governments that view gender diversity as important tend to capture its benefits, while those that do not view it with importance do not (Turban, Wu, and Zhang 2019). 57 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Actions Firms Can Take “Men should preempt the ‘chicken and the egg’ issue Be transparent and conduct candid assessments of firms’ gender diversity. Firms that do not have a significant—or any—female with more active sponsorship. partner presence are often worried about the “chicken and the egg” If you don’t have women in dilemma: if gender balance is a prerequisite for driving change, then senior positions, then men can they cannot make significant improvement in diversity levels from and should play that role.” junior to senior levels. However, our interviews with senior leaders suggest the premise does not hold. The right tone at the top—a ATUL MEHTA combination of candid assessment and committing to concrete SENIOR DIRECTOR, TELECOM action—will significantly enable change. However, the change MEDIA AND TECHNOLOGY, will be credible only if leaders are honest about the gaps that their VENTURE CAPITAL & FUNDS, IFC firms currently face and commit to change the status quo through concrete action. Set and communicate ambitious, long-term goals to demonstrate commitment. Explicit long-term goals are needed to demonstrate the firm’s prioritization and commitment to this issue through time, because changing the gender makeup of senior investment decision makers will not happen overnight. In addition, transparently sharing these goals will have a strong signaling effect to show stakeholders that the firm is committed to making progress. The goal should be rooted and communicated in the impact this would have on firm performance as opposed to a “check-the-box” compliance activity. The goal needs to be specific and timebound, with clear definitions of what the firm is seeking to achieve and by when. Sample goals that have been used by firms in the industry over periods of 5 to 10 years include these: •• Improving the gender mix of new hires to 50% •• Equalizing retention rates of women in investment roles •• Equalizing promotion rates across genders throughout the pyramid •• Increasing the proportion of employees that take and return from parental leave •• Having women represent 20% of senior leaders in private equity (e.g., Level 20)1 Create short-term targets across the pipeline and collect the data needed to measure progress against these goals. Goals help firms identify and remove biases embedded in current processes that preclude the company from interviewing, hiring, and promoting qualified female talent. Targets help articulate longer-term goals in more tangible, assessable objectives, but these are helpful only if the requisite data are available to understand changes. Most interviewees have stated that simply collecting the data would be an eye opener for firms aiming to make meaningful change, 58 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE because the data would help shine light on the true extent of the “The first step is establishing the issue. Sample gender-based targets that have been implemented by right tone from the top. Managers practitioners include these: need to establish improving •• Interview invitations per position gender diverse outcomes as •• Offers made per position •• Gender wage gap a priority. Set targets, track progress, and hold yourself Learn from successes and failures in achieving targets. accountable—comply or explain.” The principal value of targets is to provide a mechanism for ANA CARLA ABRÃO COSTA understanding internal processes that may yield low representation PARTNER, OLIVER WYMAN of women in leadership roles. If firms do not meet these targets, they should critically assess the root cause of the gap, including whether company culture is leading to gender unconscious biases in hiring decisions, promotion decisions, or sponsorship gaps. Progress against these targets should be transparently shared to create urgency for change and continuously emphasize the firm’s commitment to gender diversity. Make senior leadership accountable to move firm toward gender balance. Interviewees consistently believe that establishing accountability for outcomes is essential to driving change, or else the initiative would “slip through the cracks.” Clear accountability is the most important factor, and it could take the form of a formal diversity manager or task force. In any case, the person (or people) appointed should be senior within the organization (e.g., male and female senior investment professionals), have visibility of internal data (e.g., gender of candidates interviewed), have the authority to ask questions (e.g., understand why targets have not been achieved), and be empowered to develop and implement solutions (e.g., changing interview evaluations or case studies used). Further, compensation should be tied to progress against these goals. In general, research suggests that such accountability and ownership have tremendous long-term success. Companies that put in diversity task forces, for instance, have experienced increases of 9 percent to 30 percent in the representation of women and other minorities groups over five years (Dobbin and Kalev 2016). 59 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY CANADA PENSION PLAN INVESTMENT BOARD How tone from the top can drive change throughout an organization Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization responsible for managing more than US$278 billion (Can$368.5 billion) in investable assets for the Canada Pension Plan (CPP) on behalf of 20 million CPP contributors and beneficiaries.1 CPPIB is among the world’s largest private market investors, with investments across PE, real assets, and private credit. Increasing inclusion, diversity, and employment equity is a cornerstone of CPPIB’s business strategy and a consistent contributor to the organization’s success. CPPIB has publicly stated its goal of having an employee talent pool that reflects the communities in which it operates, because it believes diversity of insights, backgrounds, and experiences is critical to delivering exceptional long-term performance. The organization recognizes that there is an acute gap in the representation of women in the industry and hopes to drive change by leading by example. Recognizing that such leadership requires credibility through action, CPPIB is taking important steps to improve diversity in its own team as well as its portfolio companies. Goal 1: Gender balanced hiring by 2020. In 2012, less than half of CPPIB’s new hires were women, which senior leaders believed was a skewed gender mix of the available talent and was likely harming the organization’s long-term performance. Thus, the organization publicly put in place a long-term recruitment target that 50 percent of newly hired talent be women by 2020. To help achieve this goal, the organization invested resources to attract, hire, and retain women by providing coaching, mentoring, and sponsorship programs. 1 Amounts as of December 31, 2018. See the CPPIB website, http://www.cppib.com/en/. 60 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE These efforts, driven by an explicit prioritization from the top, created an environment for CPPIB to move toward gender balance over time. Establishing diverse hiring targets has had several benefits. First, it has codified the organization’s stance on diversity, which permeates through the organization and ensures everyone is working toward a common goal. Further, explicit goals have allowed the organization to track and critically assess its progress, working to identify and remove any biases in its hiring processes that would reduce women hiring rates. Finally, such prioritization has had a strong signaling effect, demonstrating a culture that is overtly inclusive of diverse talent. Though it is still working toward its goal, in 2018, 47 percent of CPPIB’s new hires were women. Goal 2: Increase investee diversity through governance and oversight. CPPIB believes that gender balance can increase the performance of its investments and, therefore, seeks to influence its portfolio companies’ diversity levels through its voting rights. CPPIB primarily achieves this by focusing on board effectiveness, voting against the chair of board committees who nominate members if the boards do not have any female directors. In 2017 alone, CPPIB voted against shareholder proposals at 45 Canadian companies with no women on their boards of directors and made efforts to speak to these organizations and to clarify why CPPIB was committed to influencing their investees to improve gender diversity. Of these 45 companies, 21 had appointed at least one female board member by the following year. CPPIB felt so strongly about the success of this policy that, in December 2018, it expanded this practice to its investments in global markets through its Global Gender Diversity Voting Practice (CPPIB 2018). “We believe that companies with gender-diverse boards are more likely to achieve superior financial performance over the long-term.” MARK MACHIN PRESIDENT AND CEO, CPPIB 61 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Figure 30: Most common recruiting channels for junior and senior hiresets A. JUNIOR HIRES B. SENIOR HIRES PERCENT PERCENT Employee 67 74 referrals Professional networks Professional Employee referrals 49 45 networks Headhunting or 37 executive search firms Inbound 45 applications Inbound applications 25 Headhunting 29 firms Previous portfolio 14 companies School recruiting Graduate school programs 22 programs 8 0% 40% 80% 0% 40% 80% Network Out of network Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses from 219 emerging market General Partners. BARRIER2: BIASES ARE PRESENT IN RECRUITMENT AND “Firms following traditional HIRING PRACTICES recruitment models in PE are tapping into their own networks Current State and not expanding much There are two general steps to hiring talent—sourcing candidates outside of this. This means the and then determining if they are the right fit for the role and firm. organization is more likely to Biases in either step will yield gaps in hiring, and this research perpetuate itself. Firms looking suggests that there are likely biases in each of these steps that are to change should assess how and reducing female representation in hiring in emerging markets. where they recruit, including Firms can hire only the talent they source, and they can source working with recruitment agents only the talent they see. Because of the heavy reliance on network- and human capital specialists that based hiring, firms likely are not seeing the full talent pool. Overwhelmingly, the most common recruiting channels for both present them with a balanced junior and senior hires are professional networks and employee group of diverse candidates, referrals. See Figure 30, panels A and B. enabling companies to select from the best talent pools.” SARA TAYLOR HEAD OF IMPACT FUNDS, CDC GROUP 62 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Network and referral-based hiring does not cut across genders “We get a relatively higher share particularly well (McPherson, Smith-Lovin, and Cook 2001). Male of qualified female applicants investment professionals’ networks tend to be male-heavy and female professionals’ networks tend to be female-heavy. Given because they see that our the low gender diversity of existing investment teams, the lack of environment is receptive to diversity in talent is likely to continue unless emerging market GPs women and that women can become less reliant on network-based hiring. successfully grow to senior Furthermore, the most important qualities emerging market firms position. It permeates through look for when evaluating junior talent are “culture fit” and “work the culture and organization.” experience.” Given the current male-dominated culture that pervades the PE/VC industry, such a significant emphasis in MAGDALENA MAGNUSZEWSKA hiring on subjective considerations such as “culture fit” risks PARTNER, INNOVA CAPITAL perpetuating gender biases and further limiting the hiring of female talent. See Figure 31. Finally, the experiences and talent pools from which firms are sourcing are not diverse. Emerging market firms are hiring from feeders that typically have low female representation. Most junior and senior employees are hired from investment banking or other PE/VC firms. Thus, increasingly diverse graduating classes at top schools or in more technical roles at technology companies will take a long time to flow through to PE/VC firms. See Figure 32, panels A and B. Figure 31: Most Important Qualities when Hiring Junior Talent PERCENT Culture fit 75 Work experience 49 Technical interview 45 performance Current capabilities 39 Educational background 38 References or 29 recommendations Expected length of employment 4 0% 20% 40% 60% Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses from 220 emerging market General Partners. 63 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Figure 32: Most Common Prior Industry Experience of Junior and Senior Hires A. JUNIOR HIRES B. SENIOR HIRES PERCENT PERCENT Investment banking 40 Private equity 40 University 20 (no prior work experience) Operational or industry experience in target sector 29 Operational or industry 18 experience in target sector Investment banking 23 Management consulting 13 Private equity 10 Management consulting 7 0% 40% 0% 40% Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses from 205 emerging market General Partvers who identify the following industry experiences as most common of junior and senior hires in their markets. Implications on Talent Management “This is a people business. If you are not trying to attract and retain GPs hoping to move toward gender balance will have to source, the best candidates, then you’re retain, and promote diverse junior talent. This underscores the importance of increasing the proportion of women in the firm’s disadvantaging yourself. You pipeline. Conventional thinking, however, suggests it is difficult can double your talent pool and to find qualified female talent at junior and senior levels, which diversify your skillset by actively contributes significantly to the gender gap. This thinking comes largely from a male lens. When asked to identify the most significant reaching out to women. Why factors explaining the low representation of female investors, men deny yourself alpha-generating identified difficulty finding qualified talent and low female interest diversification by ignoring half in private equity as the top two (of nine) factors. Women identified the work-force?” these as two of the least important. CLAUDIA ZEISBERGER Actions Firms Can Take PROFESSOR OF ENTREPRENEURSHIP & FAMILY, INSEAD, Actively look outside of existing networks to source candidates. ACADEMIC DIRECTOR OF GPEI One of the most common themes in interviews was that GPs greatly underestimate the amount of qualified female talent because these candidates are not within their networks. Firms are blinded to the available talent by overreliance on network-based sourcing. Firms can increase the number of diverse candidates interviewed by asking for connections from female investors, tapping into preexisting PE/VC networks (e.g., Private Equity 64 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY ROCKCREEK GROUP Impact of gender diverse leadership on talent management and investment decision making RockCreek, founded in 2001, is a leading global can tend to not be great sources of gender diverse investment firm that applies cutting-edge technology talent. Therefore, the firm widens its scope and actively and innovation to investments, managing approximately seeks out diverse candidates from other backgrounds, US$14 billion in assets. The firm provides various including science, technology, engineering, and services to institutional investors, including investments mathematics (STEM) and analytics. The firm hires junior in PE funds, public equities, fixed income, and hedging employees based on capabilities, including analytical markets across the globe. The firm is female founded problem solving and quantitative analysis, instead of and majority owned by women and other diverse team solely finance sector experience. This allows it to look at members. From the beginning, RockCreek has set out to candidates with backgrounds outside of finance. Finally, build a dynamic, diverse investment team with a global RockCreek asks headhunters and its school recruiting perspective that could best serve institutional investors. partners to source diverse candidates for their hiring This foundation has created a culture that naturally processes. The firm has a robust internship program for values diversity and inclusion, creating a virtuous cycle high school and college students to increase the supply in its focus on hiring and retaining diverse staff. of new talent. RockCreek emphasizes achieving gender balance in RockCreek demonstrates the impact that culture and its talent and investments. This focus is driven, in part, tone from the top can have on diversity outcomes because senior leadership and the firm’s advisory board throughout the organization. Today, about 90 percent of explicitly buys into the benefits of increased gender its senior management team and over 60 percent of the diversity. The firm views its gender balance in talent full team comes from diverse backgrounds. The diverse and firms it invests in as a natural consequence: the lens through which RockCreek’s team views the world firm is already diverse and, therefore, views good talent flows through to its investment decisions as well. As of and investments through a lens that values diverse January 2019, more than 55 percent of its underlying backgrounds and thought. portfolio companies are female-led businesses, and more than 60 percent of its private investments have at RockCreek is deliberate in its recruitment approaches to least one minority partner. ensure that candidates represent a diverse mix of talent. RockCreek ensures its hiring process is inclusive and has balanced candidates from which to choose. Further, RockCreek knows that the traditional pools from which PE talent is sourced, including investment banking, 65 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Women Investor Network [PEWIN],2 Level 20), proactively seeking “There is a myth that there is a lack out diverse candidates on campus, and requiring headhunting firms of qualified women for senior to provide them a balanced mix of candidates. investment roles in GPs. Firms Recruit capabilities not experiences. Interviews with GPs need only look outside of their have suggested that the most predictive indicators for success existing networks to realize this, in investment roles are analytical aptitude, networking, and including connecting with the negotiating, which are skills found through a variety of backgrounds and experiences. Many GPs include experiences (e.g., 10 years in growing number of networks of PE/VC or investment banking) in job descriptions as proxies for qualified female senior talent. these capabilities, which may have the unintended consequence Firms can also invest in building of causing candidates from more diverse backgrounds to not apply. GPs can rewrite job descriptions to be more specific about the types the pipeline of a diverse pool of of capabilities expected in the role. In some cases, biases toward future senior talent by recruiting certain experiences and backgrounds also flow through to the equal numbers of male and interview process, in which PE/VC case studies and interviews female employees.” tend to be related to finance. GPs can expand the types of questions used in interviews to other sectors so that certain experiences are not SUZANNE BIEGEL, presupposed. FOUNDER, CATALYST AT LARGE Be consistent with interview questions and candidate evaluations. Structured recruitment and evaluation processes ensure all candidates are evaluated according to predetermined criteria relevant to work experience, which is “crucial to minimize the impact of unconscious gender bias on hiring decisions.” (Levashina et al. 2014) Adding structure to the interview process will allow GPs to reduce the effect of potential biases in subjective evaluations of candidates. We suggest GPs do the following: •• Standardize behavioral questions to ensure they are tied to specific capabilities needed for the job (e.g., quantitative analysis). •• Use predefined case interviews instead of allowing interviewers to use their own. •• For both behavioral and case interviews, have interviewers fill out, in real time, anchored rating scales that provide descriptive or evaluative examples to illustrate points on the rating scale. Research suggests that anchored rating scales increase reliability of interviews as predictors for success, increase job relatedness of the evaluations, and reduce biases (Levashina et al. 2014). 66 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE BARRIER 3: ENVIRONMENT THAT FORCES A CHOICE BETWEEN FAMILY AND CAREER Current State Many firms simply are not meeting the bare minimum. Twenty-four “Women do not leave private equity percent of surveyed emerging market GPs do not provide maternity because they have to work too leave policies, while even more do not provide paternity leave. hard, travel too much, or because When offered, men take parental leave much less often than women in 64 percent of firms, which is consistent with broader they’re too tired. It’s because they research that suggests men’s use of paid parental leave is generally believe it will be impossible to lower than that of women’s (OECD 2016). The current disparity juggle between work and family in what policies are offered and what are actually used risks stigmatizing parental leave as a “female benefit,” introducing responsibilities. There is very little biases and negative perceptions about employees who use it. proactive effort by the industry to change that impression.” When asked, almost no senior GP leader believe taking advantage of maternity leave—which lasts only months—should significantly HALE BIYIKLI inhibit female’s careers. This message is not reaching junior PE/VC DIRECTOR, TURKVEN women, who are three times as likely to believe that taking parental leave will greatly inhibit their career progression. Interviews have shown that this perception frequently causes women to consider or eventually opt out before having children or otherwise assuming greater responsibilities at home. See Figure 33, panels A and B. Figure 33: Parental Leave and Junior Employee Perceptions A. RESPONDENTS WITH PARENTAL B. EMPLOYEES THAT ARE NOT PARTNERS WHO SUPPORT OPTIONS BELIEVE TAKING PARENTAL LEAVE GREATLY HARMS CAREER PROGRESSION PERCENT PERCENT 80% 80% 76 42 44 40% 40% 15 0% 0% Maternity Paternity Female Male leave leave Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses from 244 emerging market General Partners and 71 employees that are not partners in emerging markets. 67 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Further, many women who did take parental leave said they faced career setbacks upon their return. Interviewees spoke about situations in which they felt colleagues saw their absence as an opportunity to “get ahead.” In some cases, colleagues usurped the lead role on deals and in client relationships that the interviewees had previously been in control of and did not cede responsibility upon their return. This experience is not unique to PE/VC. Extensive research has been done on the return of top performing women who had recently taken maternity leave, indicating that many careers had been “derailed” through loss of 24% clients, deteriorated professional relationships, and unconscious biases held against employees who took leave upon their returns (Collings, Freeney, and van der Werff 2018). of General Implications on Talent Management Partners don’t have maternity It is no secret that the responsibility of family obligations leave policies disproportionately falls on women, particularly childcare and, inevitably, childbirth. Firms that are serious about retaining high performing talent should think about whether their policies or culture are intentionally or unintentionally leading employees to unnecessarily opt out of PE/VC as a career. This is not about simply having adequate parental leave and “Junior women in particular drop flexible policies or lowering the performance bar. Instead, it is out early because they think about creating a culture that encourages employees regardless of gender to take advantage of these policies, refocusing performance they are going to be forced to assessments on outputs, and proactively addressing notions choose between having kids and that performing employees must choose between personal and a career. Firms need to empower professional obligations. them to do both. Then have the conversations with them so they Actions Firms Can Take know you support them.” Offer maternity leave benefits, at a minimum. Firms interested in PRISCILA RODRIGUES improving gender diversity must, at a minimum, offer maternity PARTNER, leave. Interviewees have suggested that women would be turned CRESCERA INVESTIMENTOS off by firms that do not offer maternity leave policies, because the absence of such a policy likely would be symptomatic of broader cultural issues. This chilling effect is consistent with other research findings: a 2016 Harvard Business Review survey has found that 77 percent of respondents state that prospective employers’ parental leave policies have had at least some effect on where they chose to work (Deloitte 2016).3 68 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Create an accepting culture around equal parental leave “It is all about communication and benefits. Firms that do not offer equal paternity and maternity leave whether someone is willing to benefits reinforce the idea that parental leave is only a female benefit and a disturbance to the firm. Interviewees have stated talk about making family leave this would exacerbate the stigmas and biases against women who successful because the firm return from leave. Men and women should be encouraged to take wants to keep their talent. We’ve equal advantage of parental leave benefits, and this is often best retained women contemplating demonstrated by example of senior male leaders (Collings, Freeney, and van der Werff 2018). leaving 90% of the time because we spoke about our commitment The firm’s tone on parental leave should clearly emphasize that to retain them. It may be ‘taboo’ a break of months does not impact a career of decades. This can often be demonstrated effectively through changes to company for some men to do this, but they policies as well as a clear tone from senior leaders. For instance, just need to start the conversation.” Google decreased its attrition of female employees by 50 percent after extending paid leave benefits from 12 to 18 weeks. Google has CHRISTINA GAW found that the costs of having employees out of the office for two MANAGING PRINCIPAL, GAW CAPITAL extra months were far less than the value of retaining their expertise and the cost that would be incurred finding a new hire (Bock 2015). Though PE/VC firms often do not have the data to analyze this themselves, interviewees expect that this break-even calculation would be similar or potentially even stronger in PE/VC—a “The biggest change is that we “people business” that is heavily reliant on relationships, intuition, and experience. have become more flexible as a company. We don’t care Enable synchronous work/family management, rewarding output only about hours spent in the instead of facetime. This shift in perspective is not about lowering the bar, but instead about making performance metrics more outcome- office – we care about output. If oriented and inclusive of various personal obligations. Without employees want to leave the office this shift, employees are often deterred from taking advantage of at 4:30PM to pick-up their kids programs, such as flexible working hours and location, which may be and work afterwards, they know it required to adequately balance work and personal obligations upon return from parental leave. is okay. This has made employees more motivated and willing to go the extra mile.” ANDREA HEINZER CHIEF INVESTMENT OFFICER, OBVIAM 69 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY MULTIPLES ALTERNATE ASSET MANAGEMENT “It’s our investment in people that guarantees success” Multiples Alternate Asset Management (Multiples) is and family-like bonding—can help attract and retain an India-dedicated PE buyout firm that manages over top talent. Multiples’ culture embodies principles of US$1 billion in assets. Founded by Renuka Ramnath in trust, win-win, and fulfilling potential. This has resulted 2009, the firm invests in companies in consumer, finance, in a highly collaborative workplace in which team health care, technology, and logistics companies in India. members are genuinely interested in each other’s success. Such a work environment naturally has no As a female-founded firm, Multiples believes it has a glass ceilings. natural advantage in attracting and retaining female talent. The firm is deliberate in nurturing a deep Multiples provides holistic opportunities for professionals respect for the diverse strengths that male and female to grow as leaders. Younger team members participate professionals bring. When firm leaders speak about shoulder to shoulder along with founding team PE/VC careers, the narrative focuses on the high members in developing strategies that will shape the work intensity being a continuum between work and firm’s future. The firm encourages self-discovery using home as opposed to it simply being a “demanding tools such as Hogan and Gallup’s StrengthsFinder. job,” thereby framing the discussion in a family Multiples’ investment in its people and culture provides inclusive manner. a competitive advantage in attracting and retaining top talent of all genders. It can differentiate itself in its Multiples actively supports this continuum in several representation of female talent: four out of the top nine ways. Through personal examples of senior women investment professionals are female. leaders in the team, younger professionals are motivated and mentored to further their drive and fulfill their ambitions. The firm sets up opportunities for families of team members to interact and get to know each other and the firm, such as in annual offsites and Diwali celebrations. Employees find it easy to discuss personal conflicts and seek solutions as a team. Investment professionals at Multiples even find it natural to talk “Showing women that it’s a continuum between about investing from a parenting lens—one saying that work and home makes the choice of a career in “nurturing and influencing portfolio companies is like private equity easier. Work goes home with you influencing your teenager.” and home with you to work.” Multiples is an example of how building the right NITHYA EASWARAN culture—high performance with sense of ownership MANAGING DIRECTOR, MULTIPLES 70 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE BARRIER 4: SPONSORSHIP GAPS AND FEW FEMALE ROLE MODELS ARE LIKELY REDUCING RETENTION AND PROMOTION OF JUNIOR FEMALE TALENT Current State Our survey of midlevel and junior investment professionals4 in emerging markets suggests that junior women believe they are disadvantaged in their career paths. Female respondents are 13 percentage points less likely than men to consider themselves working in PE/VC five years from now, 22 percentage points less likely than men to believe they have sufficient senior sponsorship to continue progressing; and 38 percentage points less likely than men to believe men and women have equal opportunity to be promoted to partner. See Figure 34. Our interviews and survey suggest that the perceptual gaps across genders are in part driven by limited female senior representation in PE/VC, which lags other industries and can create sponsorship gaps and non-inclusive cultures. In our survey, female respondents have Figure 34: Junior Employees’ Career Perceptions by Gender PERCENT PERCENTAGE POINT DIFFERENCE Work in PE in 80 13pp 5 years? 67 Sufficient 74 sponsorship? 22pp 53 Equal opportunity 74 to partner? 38pp 36 0% 20% 40% 60% Female Male Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses from 71 employees that are not partners of emerging market General Partners. PE = private equity. 71 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE described the lack of female role models and senior sponsorship “Significant improvement in as more significant hurdles than inflexible work arrangements. See senior female representation will Figure 35. The combination of these factors could be reinforcing and limiting female progression. Though both are important to take time as the pipeline of new success, sponsorship and mentorship are distinct concepts. While candidates move up the ranks. It is mentorship is often a prerequisite to sponsorship, mentors focus easier to get gender diverse junior on giving feedback and advice. Sponsors go beyond mentors, teams, but this means firms have often advocating on behalf of their mentees to help them get the visibility they deserve and get them in the right roles so they can to put significant focus on enabling perform (Ibarra, Carter, and Silva 2010). Research by Catalyst, a them to move up the ladder.” global nonprofit helping to build workplaces that work for women, has identified adequate sponsorship as an essential component of CYRIL COLLON professional success, because it helps top performers develop new GENERAL PARTNER, PARTECH skills and achieve greater visibility, enabling them to progress (Foust- Cummings, Dinolfo, and Kohler 2011). These researchers suggest that gaps in promotion rates between men and women can exist because women are not actively sponsored in the way and to the extent that men are (Ibarra, Carter, and Silva 2010). Figure 35: Female Respondents’ View on Drivers for Low Gender Diversity PERCENT 40% 39 28 21 20% 0% Junior women have Junior women do not Inflexible work few female get the sponsorship arrangements role models in they need to progress senior positions Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses from 76 women at emerging market General Partners. The factors are a subset of the nine total options available to respondents, which included difficulty finding qualified female talent, low female interest in private equity, recruiting biases favoring men, traditional gender stereotypes reduce hiring, and improving gender diversity is not a priority of firms. 72 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Only 31 percent of emerging market firms have formal sponsorship programs , and the omission of formal sponsorship programs, particularly in male-dominated PE firms, may be allowing women to fall through the cracks. Research suggests that mentor and sponsor relationships are less likely to materialize organically across dissimilar groups. Research by David Thomas, an emeritus professor of Business Administration at Harvard Business School, has found that “white male executives don’t feel comfortable reaching out informally to young women and minority men. Yet they are eager to mentor assigned protégés, and women and minorities 31% are often first to sign up for mentors.” (Dobbin and Kalev 2016) In addition, a research study of VC investors by Harvard Business School professors suggests that “gender bias in informal mentoring systems,” including limited participation among male mentors, has hindered female employees’ investment performance (Gompers et of General Partners have formal al. 2014). sponsorship programs Implications on Talent Management The data on midlevel employees5 show that the pipeline of midlevel talent is relatively more diverse than at senior levels, which could be reason for optimism. Analyzing the pipeline across emerging markets underscores the importance of developing and retaining “Women don’t always have the female talent, particularly for the Middle East and North Africa same opportunities and access (MENA), Latin America and the Caribbean (LAC), and South Asia, which currently lag emerging market peers. These regions would to sponsorship as men do, for a gain the most from seeing midlevel female talent move to senior number of reasons. Finding ways roles, because the proportion of midlevel investment professionals to narrow that gap will benefit is nearly twice as large as a group compared to senior roles. See women, men and the businesses Figure 36. where they work.” ANNIE PAYDAR Actions firms can take GLOBAL HEAD OF HUMAN CAPITAL, GENERAL ATLANTIC Ensure mentorship programs are formalized in the organization. The idea of organic relationships is attractive, but it depends on natural connections being developed that often do not materialize, particularly for women in otherwise male-dominated firms. Firms can address this by introducing formal mentorship programs that match senior and junior employees from day one. Separate research on larger organizations have found that mentoring programs increase the representation of black, Hispanic, and Asian American women in management by 18 percent to 24 percent over five years (Dobbin and Kalev 2016). These programs help junior 73 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Figure 36: Percent of General Partner Investment Employees who are Female PERCENT 30% 23 20 19 17 15% 15 14 14 14 12 11 10 7 8 7 Mid-level 0% Senior Overall East Asia South Asia LAC ECA MENA SSA Sources: Aggregated Private Equity/Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: Based on a sample of more than 10,000 senior investment professionals and 5,000 midlevel professionals. ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa. employees feel more included, become more effective at their job, “Mentorship does not need to be and increase the chances they eventually develop sponsorship solely woman-to-woman. I want relationships. They also help show the mentors that “their protégés to be treated as a professional. I deserve the training and opportunities they’ve received.” (Dobbin and Kalev 2016) welcome guidance and input from whomever is best positioned to These “reverse benefits” of mentorship underscore that mentorship provide it, regardless of gender.” relationships need not be gender-based. When asked about mentorship, female interviewees have consistently identified a MARIA KOZLOSKI desire for these relationships to be with the people in the firm who GLOBAL HEAD & SENIOR MANAGER, have the strongest capabilities and investment in the relationship, PRIVATE EQUITY FUNDS, IFC regardless of gender. Mixed-gender relationships provide an opportunity for reverse mentorship, which enables senior male leaders to learn about the experiences of women in their firms and receive feedback on how to create a more inclusive culture. Collect data on sponsorship gaps with network maps. Network maps—which can be used to see organizational connections by asking employees to name other employees they could sponsor—are an effective tool for firms to test if there are specific employees or groups of employees that have less access to sponsorship within the firm than others. When answers are aggregated, firms can identify matches in which both the sponsoring and sponsored employees mutually identify one another, as well as situations in which junior employees do not have matching sponsors. This data will allow firms 74 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE to not only identify gaps for junior employees but also identify senior employees who are not actively or effectively sponsoring any junior employees (e.g., “mismatches” in which the junior employees they believe they are sponsoring have not identified them as a sponsor). In any case, network maps will provide the fact base to understand any sponsorship gaps, which should then be remedied. Make senior employees formally responsible for sponsorship. Formalizing sponsorship relationships will help reduce the risk of people simply codifying existing relationships. Organic sponsorship is most attractive, but it hinges on natural connections being developed that often do not materialize, particularly for women in otherwise male-dominated firms. Ensuring that every employee has at least one sponsor within the firm who is at least in part responsible for the success of the junior employee will help mitigate this risk. These responsibilities can be in the annual goals of—and embedded within—performance reviews for senior employees. GENERAL PARTNERS— MANAGING THE INVESTMENT FUNNEL Ninety-four percent of surveyed GPs in emerging markets believe that women are underrepresented in leadership teams that receive PE/VC investment capital. This is consistent with our findings, in which female-led businesses receive only 8 percent of deals. Unlike in the talent management gap, male and female industry leaders often agree that the most significant drivers of the low levels of investments in female entrepreneurs are due to external factors, including social norms and low entrepreneurship rates. However, the extent to which gender biases are present varies by the gender of respondents. Female practitioners are roughly twice as likely to believe that biases in sourcing, and due diligence of potential investments contribute to the gap between female entrepreneurial rates and capital allocations. See Figure 37, panels A and B. Our research suggests that there is likely a combination of external and internal factors that contribute to low female representation as leaders in portfolio companies. Externally, some factors, such as relatively lower representation of women in leading entrepreneurial roles in target industries, are at least in part contributing to the low representation of female business leaders who may otherwise enter PE/VC pipelines. However, our research also suggests that there are 75 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Figure 37: General Partners’ View on Drivers for Low Female Representation in Portfolio Companies A. MALE B. FEMALE PERCENT PERCENT Local cultural or social norms reduce female leadership rates 76 73 Women entrepreneurs less likely in target or 47 54 growth industries  Women entrepreneurs do not receive enough 30 36 support at early stages Deal sourcing methods not equally accessible to 20 32 female entrepreneurs Firm Women entrepreneurs treated differently in 12 32 due diligence processes External factors 0% 40% 80% 0% 40% 80% Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Based on responses from 190 emerging market General Partners. Data reflect results from respondents who believe the following are most important factors for why there is low gender diversity in senior management teams of portfolio companies. likely biases in the current sourcing, investment decision making, and investment oversight processes that are limiting the amount of capital being allocated to female-led and gender diverse businesses. BARRIER 1: PERCEPTION THAT FEMALE ENTREPRENEURSHIP IS LOW, PARTICULARLY IN TARGET INDUSTRIES AND BUSINESS SIZES Current State Practitioners most often explain the gap in capital received by female entrepreneurs in terms of the following external factors: (a) market or social conditions limit female leadership or entrepreneurship rates; (b) low representation of women entrepreneurs in target or growth industries; and (c) a lack of female-led businesses requiring capital at the levels at which firms are interested in deploying. Industry practitioners often cite market or social conditions that reduce the number of female entrepreneurs. However, analysis of the proportion of women exploring entrepreneurial endeavors at 76 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE early stages show that the percentages are significantly not explain the low proportion of funding being received higher than the proportion of women receiving PE/ by female-led businesses. Most PE deals in emerging VC capital in emerging markets.6 Approximately markets have focused on information technology or 40 percent of early stage entrepreneurs are women, consumer products and services (B2C) industries in the compared to 8 percent of portfolio companies that are last five years. If a shift to these industries has reduced female-led. (Global Entrepreneurship Monitor 2018). the proportion of female-led businesses that receive Though the entrepreneurship rates are not directly investments, the proportion of female-led businesses analogous to the number of businesses that would would be below the market rate in these sectors. be targets of PE/VC investments (e.g., operating at However, the distribution of female-led businesses by the right scale), they do suggest that the low levels industry is comparable to the distribution in the overall of capital being allocated to women are not entirely market. As such, the preconception that women are explained by low female entrepreneurship rates. See underrepresented in high growth industries is likely not Figure 38. accurate. See Figure 39, panels A and B. When analyzing the proportion of investments in Deal-level analysis of portfolio companies supports female-led businesses by industry in emerging markets, the trend that female-led businesses are much more the data suggest that the shift toward high growth common at lower investment levels. Female-led technology and business to consumer industries does businesses account for 12 percent of deals smaller than Figure 38: Total Female Entrepreneurship Rates Compared to Percent of Female-Led Companies Receiving Private Equity or Venture Capital Investments by Market PERCENT 50% 50 40 40 40 35 35 30 25% Female-led investee companies 8 9 8 9 9 6 7 Percent of early stage opportunity entrepreneurs 0% that are women Overall East Asia South Asia LAC ECA MENA SSA Sources: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Global Entrepreneurship Monitor (2018) Note: Data reflect percentage of portfolio company deals that are female-led by deal size. Based on a sample of over 5,400 Private Equity/Venture Capital investments in emerging markets. 77 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE US$100,000, compared to 6 percent of deals larger than Actions Firms Can Take US$100 million. However, these data do not speak to the opportunities that may have been foregone at these Collect data to assess whether there are underlying levels and the potential barriers female entrepreneurs biases in the investment process. GPs are divided on the face to receiving larger funding. extent to which low representation of women as investees is driven by unconscious biases or external market factors; however, there is reason to believe both are at Implication on Investment Management least playing a role. All firms, however, would benefit from collecting the data necessary to test whether there may Though the relatively low levels of capital being invested be return-reducing biases embedded in their investment in female-led businesses may be driven in part by external process. This will require firms to collect and then analyze factors, our findings suggest that internal factors, such as gender data at different points in the investment funnel unconscious biases and narrow sourcing funnels, are likely to understand whether female-led businesses or gender contributing as well. If untested, the perception that the diverse teams are disproportionately falling out at gender gap in capital recipients is explained by external different stages. PE/VC firms can track diversity metrics factors outside of the control of GPs risks becoming a self- of (a) deals sourced; (b) deals undergoing due diligence; fulfilling prophecy perpetuating today’s gaps. As such, (c) investments made; and (d) hiring of senior managers GPs should develop the fact base to test this perception and board members. Collecting and then analyzing these and understand if biases are potentially precluding them data will allow firms to understand whether biases exist from promising investment opportunities. and then diagnose the root causes of biases. Figure 39: Percent of Deals by Industry in Overall Market and Female-Led Businesses A. DEALS IN OVERALL MARKET B. DEALS IN FEMALE LED BUSINESSES 1% 4% 3% Materials and resources 4% 9% 8% Energy 30% 31% 12% Financial Services 9% Health care Business products 14% and services (B2B) 20% 24% Consumer products 29% and services (B2C) Information Technology DEALS THAT GO TO FEMALE LED BUSINESSES PERCENT Information Consumer products Business products Health care Financial Energy Materials Technology and services (B2C) and services (B2B) Services and resources 8% 10% 6% 11% 9% 7% 3% Sources: Aggregated datasets from International Finance Corporation; PitchBook; and other publicly available datasets. Note: Based on a sample of more than 4,800 Private Equity/Venture Capital investments in emerging markets that have sector classifications and gender data of Chief Executive Officers. 78 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Create gender diversity targets across the investment funnel. Several of the interviewed PE/VC firms have established rough targets for the diversity of their potential deal flow, including at entry points into seed or accelerator programs. When these firms miss the targets, they critically assess their processes, asking whether they are inadvertently establishing preclusive barriers, are doing enough outreach to tap into new networks, or are doing too few interviews. Unsurprisingly, these firms tend to have significantly higher proportions of their investments in diverse businesses. However, these firms are the minority: only about 25 percent of emerging 25% market PE/VC firms have gender diversity targets for deals sourced and opportunities that undergo due diligence. BARRIER 2: NETWORK-BASED SOURCING MAY of emerging market Private Equity and BLIND MALE OR FEMALE DOMINATED FIRMS TO Venture Capital POTENTIAL DEALS firms have gender diversity targets Current State for deals sourced and opportunities Surveyed practitioners in emerging market PE/VC have stated that that undergo most of their deals are through network-based channels, including due diligence their professional networks (94 percent) and referrals from existing portfolio companies (56 percent). Though there could be reason to believe that proprietary sourcing channels may be overstated in self-reported data, the reliance on proprietary deal flow in emerging markets has been reaffirmed in interviews. The reliance on network-based sourcing is likely reducing the number of female-led businesses that enter the deal funnel and thus ultimately receive capital. Research suggests that networks naturally develop between people of similar genders, ethnicities, and backgrounds (McPherson, Smith-Lovin, and Cook 2001). As such, there tend to be fewer female-led businesses that enter the deal funnel from a male dominated network. See Figure 40. 79 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Figure 40: Most Common Channels for Deal Sourcing PERCENT Professional network 94 Existing portfolio company referral 56 Cold calling/research 47 Investing in new company for previously 26 invested entrepreneur Limited Partners 13 Public auction 6 Network 0% 50% 100% Out of Network Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Data reflect percentage of emerging market respondents who identify the following channels through which deals are mostly generated. Based on responses from 131 emerging market General Partners. Implication on Investment Management diverse investment teams will incrementally add more diverse investment opportunities to firms’ deal flow and Though many GPs believe that external factors help firms identify and “sell” top diverse entrepreneurial significantly explain the current low representation of talent, as is established earlier in this report and women as recipients of capital, these perceptions are demonstrated by several GPs. based on the investment opportunities that they see in the deal sourcing process. Our research suggests that Proactively seek out female entrepreneurs. GPs emerging market GPs are extremely reliant on networks interested in expanding their deal flow can work with for sourcing their deals. This reality could mean that female entrepreneurial networks and organizations male dominated firms, whose networks are likely to to expand their visibility of female-led opportunities. have a lower proportion of female entrepreneurs in Several female angel investor networks, which cater them, are not seeing or connecting with the female-led to early stage companies, and entrepreneurship opportunities that do exist. networks, which support entrepreneurialism more broadly, operate in various regions, including in Africa Actions Firms Can Take and the Middle East. Such initiatives would help firms connect with current and future entrepreneurs, as Establish new networks by building a diverse well as better understand the market needs they investment team. Our interviews and survey of are trying to serve. Active participation in these emerging market GPs indicate that firms are extremely organizations would help them overcome network dependent on networks to source their deals, but barriers and enhance firms’ understanding of markets these networks are dominated by people that look otherwise overlooked. This would also have a strong similar to themselves. One of the most effective ways signaling effect to other gender diverse entrepreneurs, to overcome these barriers is to have investment potential diverse new hires, and LPs interested in teams whose makeup is more representative of the moving toward gender balance in their direct and entrepreneurial landscape than the status quo. Gender indirect investments. 80 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY 500 STARTUPS Gender diverse sourcing through diverse investment teams 500 Startups is an active global VC firm that has invested diverse entrepreneurs through networking and in more than 2,000 companies and 4,500 founders in educational programs. 500 Startups contributes to more than 70 countries around the world. The mission the development of thriving innovation ecosystems of the organization is to discover and back the world’s around the world to better equip startups with tools to most talented entrepreneurs, help them create successful succeed by running educational programs, events and companies at scale, and build thriving global ecosystems. conferences, and partnerships with global corporations and governments. The firm’s Seed Accelerator Diversity permeates throughout 500 Startups’ Programs, for instance, emphasize digital marketing, organization, and inclusion has become one of their customer acquisition, and fundraising for early stage core values. Understanding the importance of a gender companies. These programs enhance the broader inclusive culture, the firm believes that PE/VC firms of emerging market entrepreneurial ecosystem, and help the future do not look like firms from the past, and that 500 Startups’ investment team broaden its network moving toward greater diversity will differentiate the firm. across genders, geographies, and industries. This access The team of more than 100 professionals consists of to new networks allows the firm to overcome network 51 percent women. The firm uses targets to establish barriers and generate unique deal flow that other diversity goals and aims for gender balance in the investors may not see. company, without committing to specific quotas. The firm also runs investor training courses often hosted (in 500 Startups’ efforts to develop diverse investment partnership with top universities such as the Stanford talent and expand its entrepreneurial networks has Center for Professional Development and UC-Berkeley) allowed it to successfully attract more diverse companies for up-and-coming investors around the world. They to its portfolio. The firm has a distinguished track record, always ensure that at least one-third of each group of the having raised more than US$475 million throughout course participants are women, offering scholarships 19 funds. Moreover, 525 companies in their portfolio for female investors when needed. 500 Startups also of more than 2,000 startups have at least one female sends new hires on its investment team to the training founding team member. In the two most recent batches programs to ensure everyone has the skills and mindset of its seed accelerator program in San Francisco, more they need to succeed. than one-third of the companies have had at least one female founder. Additionally, four of the 10 unicorns 500 Startups is focused on increasing its pipeline of 500 Startups has invested in (Canva, CreditKarma, Grab, female entrepreneurs, which it achieves by supporting and Talkdesk) include a female co-founder. 81 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY FLAT6LABS Finding and supporting the growth of women entrepreneurs in Middle East and Northern Africa Flat6Labs is a regional startup accelerator program Through this initiative, Flat6Labs has begun to focus on that provides seed funding, strategic mentorship, and the existing pool of potential female entrepreneurs and entrepreneurship-focused business training to its converting them to seriously pursue an entrepreneurial investments in six countries in the Middle East. Through path. In many cases, this requires “eliminating myths and its programs, Flat6Labs has supported more than beliefs that women can’t be entrepreneurs,” according 1,000 entrepreneurs leading more than 200 companies, to Dina el-Shenoufy from Flat6Labs. The program helps of which about 50 percent have received follow-on demystify a lot of issues, talks through the risks, and funding. The organization prides itself on creating an goes through success stories of aspiring entrepreneurs. environment in which passionate entrepreneurs can Recognizing that female entrepreneurs often lack the right rapidly thrive, in part due to an expansive network of mentorship from the outset, StartEgypt brings in female more than 500 mentors, investors, and partner entities.1 speakers to help make the necessary connections and build the support networks to help female entrepreneurs Flat6Labs has partnered with the British Embassy in go from ideation to execution. Cairo and IFC to implement a startup initiative that inspires and supports thousands of current and aspiring Though the program is still in its first cohort, StartEgypt Egyptian entrepreneurs. The initiative, StartEgypt, has already sparked tremendous interest and action was announced at the end of 2017. It provides in female entrepreneurs who may not have otherwise entrepreneurial support services, awareness activities, pursued the path. In its first cohort, StartEgypt had and a unique incubation program along the themes of 27 percent of its startups led by female entrepreneurs. ideate, build, and accelerate. The program began with Three of the five female-led startups were nominated several activities and workshops, including startup as the top 10 startups of the cycle. competitions, hackathons, and ideation sessions, followed by a six-month incubation program. “People are discussing solutions to improve There is a large female entrepreneurial gap in MENA, gender diversity at stages that are too late in and a significant component of StartEgypt has been the funnel. In many markets, it may be more improving female engagement and gender diversity about supporting and enabling potential female of entrepreneurs in the region. Only 5 percent of entrepreneurs at the earliest stages instead of formal firms are led by a woman and, for every female finding the ones that are ready now.” entrepreneur in MENA, there are six women who want to start a business but do not pursue the opportunity.2 DINA EL-SHENOUFY CHIEF INVESTMENT OFFICER, FLAT6LABS 1 See the Flat6Labs website, https://www.flat6labs.com/. 2 See the World Bank Enterprise Surveys website, http://www.enterprisesurveys.org. 82 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE BARRIER 3: UNCONSCIOUS BIASES Outside of industry experience, these considerations IN DUE DILIGENCE MAY CAUSE tend to be subjective and therefore are potentially at risk FIRMS TO UNDERVALUE GENDER of being affected by unconscious biases. For instance, DIVERSE ENTREPRENEURS several studies have found biases in the way that female entrepreneurs are asked questions in the due diligence process, including the tendency for women to be Current State asked defensive, nongrowth questions relative to male entrepreneurs, who are asked growth questions about When potential opportunities are sourced and scaling their businesses, reducing funding outcomes for eventually evaluated, the most significant consideration women (Kanze 2017). Furthermore, when analyzing the in whether to invest in a company is the management way female entrepreneurs were asked questions during team. Eighty-five percent of emerging market senior due diligence processes, researchers identified trends investment professionals have identified this as a top that women were often questioned about their technical consideration, roughly 38 percentage points higher knowledge and capabilities whereas men were not, or than the second most important consideration. When women were simply assumed that they did not know evaluating management teams, surveyed GPs most the technology (Abouzahr et al. 2018). These issues are strongly value an ability to articulate a vision for growth, compounded by the fact that investors tend to be drawn personality traits, and characteristics, and relevant toward entrepreneurs that were or feel like previous industry experience. See Figure 41, panels A and B. “winners,” which can create an unconscious bias against Figure 41: Most Important Attributes of Portfolio Companies for Investment Decision Making by General Partners A. RESPONDENTS THAT BELIEVE FOLLOWING B. AVERAGE RANKING OF QUALITIES ATTRIBUTES ARE MOST IMPORTANT IN DECREASING ORDER OF IMPORTANCE PERCENT PERCENT Ability to articulate Management team 85 2.4 vision for growth Business model 47 Personality traits 2.8 and characteristics Firm’s ability 44 to add value Relevant industry 2.9 experience Market 30 P&L management 4.3 experience Valuation 29 C-level experience 4.5 Portfolio company’s fit with the firm 21 Relevant sectoral Product 16 education 5.3 Industry 12 Finance experience 5.8 0% 50% 100% 0 3 6 Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Data reflect percentage of emerging market respondents who believe these attributes are most important when evaluating investments. Average ranking of most important qualities when evaluating management team. Based on responses from 135 emerging market General Partners. P&L = Profit and Loss 83 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE female entrepreneurs who have been traditionally Firms can create more structure around due diligences underrepresented as capital recipients. to maximize consistency. Firms can standardize the questions to ensure that male and female entrepreneurs Implications on Investment Management are pressed on similar issues. Similar to the work that was done in other research, investment team members Several unconscious biases may affect the way or third parties can be asked to observe key portions investment teams evaluate female-led or gender of the diligence process to assess whether biases may diverse management teams, ultimately reducing have affected the outcome. Finally, firms can protect the amount of capital these businesses receive. As against group think by using two investment teams such, even if GPs are seeing many gender diverse tasked with developing competing investment cases in opportunities, they may not be evaluating them favor of and against the opportunity. fairly. The biases are at risk of being particularly acute in situations in which decision making is based on Positively screen for gender diverse management heuristics or “gut instincts,” a situation often found in teams. Firms that believe that gender balance in the early stage companies. leadership of portfolio companies would improve returns should explicitly include gender diversity as a positive investment consideration. However, only 29 percent of Actions Firms Can Take surveyed emerging market GPs actively consider the gender diversity of potential portfolio companies’ senior Reduce the potential for unconscious biases to management teams when conducting due diligences. influence investment decisions. GPs can reduce The diversity of the management team and the broader potential unconscious biases by increasing the diversity employee base should be viewed as a differentiating factor of the investment team that is involved in the evaluation when evaluating prospective investment opportunities. process, even at junior levels, and ensuring the decision- This will require asking for sex-disaggregated data in the making process is sufficiently inclusive so all people’s due diligence process and systematically including that considerations can be heard. In some instances, this information in the evaluation process. could require formalizing a consensus driven decision- making process, in which all decision makers need to agree on and be comfortable with the outcome. 84 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY VillageCapital VILLAGE CAPITAL Disrupting how capital is allocated to women entrepreneurs Village Capital is an early stage VC firm that uses a unique, award-winning investment process to allocate capital to companies solving the world’s largest problems in agriculture, education, energy, financial services, health, and other sectors that relate to underserved communities and resource sustainability. Village Capital recruits and trains cohorts of 10 to 12 entrepreneurs in multiday workshops that cover topics such as team management, customer discovery, financial planning, and how to use capital to most effectively scale their businesses. The multiple month program culminates in an investment process in which entrepreneurs openly assess one another’s businesses, and the two highest-ranked ventures receive seed capital investments of US$50,000 to US$100,000 from investors that have pre-committed capital. Historically, this is from Village Capital’s affiliated fund, VilCap Investments, but also other co-investors. Village Capital has managed more than 60 programs in more than a dozen countries, working with more than 1,000 entrepreneurs and facilitating over 100 investments. Village Capital uses the peer selection process to disrupt how investments are made in early stage companies and transform the way capital builds companies. The peer selection model addresses a problem that its founders, including Ross Baird and Victoria Fram, have identified in their early experiences as entrepreneurs and investors: investors’ reliance on pattern recognition was causing them to miss opportunities at the “top of the funnel.” Enterprises’ need for investment and mentoring far exceeded the capacity of VC firms required to provide it at the level that promising entrepreneurs deserved. In the end, entrepreneurs not receiving capital often gained little by going through the time-consuming process. Further, there was a skewed power dynamic between entrepreneurs and investors. Entrepreneurs who could not self-finance were required to force their business models to fit investors’ visions as opposed to their consumers’ needs. Village Capital’s program enables a diverse group of entrepreneurs to candidly coach and teach one another, and then peer select the businesses most ready for seed capital. The ranking processes are structured through comprehensive evaluation matrices that promotes collaborative learning and growth. The process ensures the due diligence process adds value by becoming relational instead 85 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE of transactional and shifts the focus to customers instead of investors, allowing entrepreneurs to use their collective experiences to accelerate business growth in an educational, village-like community. This model is based on the concept of communal lending that has been common in emerging markets. Village Capital believes that flipping the power dynamics of the investment process eliminates decision-making biases and blind spots that cause male-dominated investment teams to overlook promising opportunities and disproportionately invest in male-led businesses. The program managers believe that diverse backgrounds and experiences greatly enhance the process for all, and thus, make efforts to ensure that interviewed applicants for the programs’ cohorts are diverse. On average, 40 percent of the cohort comprises female-led ventures (female- founded or co-founded). Village Capital’s innovative approach to capital allocation has helped build successful entrepreneurs and mitigate investment biases that may preclude capital being allocated to a diverse group of entrepreneurs. The firm’s program and approach to investment has yielded the following: • Diverse set of capital recipients. Delegating investment decision making to a diverse group of entrepreneurs has equalized capital allocation, in which 44 percent of the capital invested is going to women, which is more than twice the industry average. • Successful coaching and building of business leaders. The program has a track record for establishing viable business leaders. Although only two businesses in each cohort receive investments, alumni in the cohort overall raise 2.9 times as much funding as a control group, and generate 2.3 times as much revenue. • Highest performing businesses receiving investments. Village Capital’s process mitigates much of the biases from the process and allows the best companies from each cohort to surface. A recent analysis of the peer- selected investment process has found that the gender bias that commonly occurs within traditional venture capital is mitigated during the peer review process: rather than women getting crowded out, they are evaluated by their peers based on the merits of their company. Initial internal analyses of Village Capital’s portfolio suggests that selected businesses are the strongest performers in terms of capital raised and revenue growth through time. “We launched Village Capital on a radical idea: if we change the power dynamics of venture capital, we might be able to empower a more diverse set of entrepreneurs solving a more meaningful set of problems. Peer-selected investment is, at its core, about changing the culture of venture capital — creating an environment where the best ideas get funded, regardless of who or where they come from.” ALLIE BURNS CEO, VILLAGE CAPITAL 86 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE BARRIER 4: GENERAL PARTNERS DO NOT USE would improve returns. This manifests both in the data OVERSIGHT TO IMPROVE DIVERSITY that GPs acquire of portfolio companies and how GPs help their companies source senior talent. For instance, One of the most impactful changes GPs can make is more than 60 percent of emerging market GPs do not in how they manage the interface with their portfolio track sex-disaggregated employment data of portfolio companies. PE/VC firms, for instance, could have companies post-investment. indirect oversight of 10 times or 100 times more employees through the investments they make in Interviewees consistently express one of the most their portfolio companies than through their direct impactful means of oversight that GPs have on investees employees. GPs looking to move their portfolio is on human resources and talent of the portfolio companies toward gender balance can ask questions companies. This influence often takes form in the about gender diversity, help source gender diverse sourcing of senior leaders as well as potential board candidates for senior management roles, and share members. However, only 34 percent of surveyed firms in best practices with their portfolio companies. emerging markets screen for or pursue gender diverse candidates when making senior management changes Current State in portfolio companies. Further, the channels in which these candidates are sourced are largely network-based, PE/VC firms are not taking advantage of their influence so the talent pool being considered is unlikely to be over portfolio companies to move them toward gender gender balanced, particularly in firms that are male or balance even though over half of firms believe this female dominated. See Figure 42. A lack of deliberate Figure 42: Most Common Channels for Sourcing Portfolio Companies’ Senior Leadership PERCENT Headhunting or executive recruiting firms 65 Referrals 65 Employee professional 57 networks Ad hoc candidate search 28 Previous portfolio companies 28 Internal bank of Out of network executive candidates 19 0% 30% 60% Network Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Data reflect percentage of emerging market respondents who identify the following channels through which senior leaders for portfolio companies are generally sourced. Based on a sample of 99 emerging market General Partners 87 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY KAPOR CAPITAL The Founders’ Commitment to Diversity Kapor Capital is an early stage VC firm that believes in the power of transformative ideas and diverse teams. Kapor Capital believes that startups can leverage information technology to address urgent social needs in education, finance, health, justice and more. Key to this philosophy is the firm’s deep commitment to intersectional diversity. Their entrepreneurs come from underrepresented backgrounds, including race, gender, and socioeconomic status, and the firm believes that these lived experiences provide their portfolio companies a competitive advantage. Kapor Capital’s investment team consists of majority underrepresented people of color and half women. The team’s diversity is a strategic advantage in increasing deal flow. Entrepreneurs with gap-closing businesses often want Kapor Capital as an investor, even when deals are oversubscribed; they count on the firm to be a strategic partner. Project Diane reports that Kapor Capital has invested in more black women entrepreneurs than any other firm. Kapor Capital believes that investing in underrepresented entrepreneurs can yield new ideas, markets, and revenue streams that others have overlooked. The firm puts this philosophy into action in its investment decisions, with these results: •• Over 50 percent of its investments have a founder who is a woman or a person of color from an underrepresented background. •• More than 40 percent of its first-time investments have a female founder. •• Over 25 percent of its first-time investments have a founder of a racially underrepresented background. Kapor Capital applies this philosophy to its portfolio companies through the Founders’ Commitment, which asks CEOs to commit to build a company with 88 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE an inclusive culture that is explicitly looking for talent from diverse backgrounds. The commitment, which launched in January 2016, is embodied in four actions (“G.I.V.E.”) that all portfolio companies agree to carry out: •• Goals. Establish diversity and inclusion goals tailored to the company’s funding stage, size, customer base, and core business, and provide transparency against those goals in quarterly investor updates. •• Invest. Invest in technology, training, or resources that mitigate bias in employment life cycle. •• Volunteer. Organize opportunities for employees to engage with underrepresented communities, particularly groups that reflect the company’s customer base. •• Educate. Participate in diversity and inclusion sessions, which are hosted by Kapor Capital, to learn effective strategies and tools. The Founders’ Commitment embeds diversity and inclusion in the DNA of companies before the organizations become too large to turn around. Kapor Capital does not prescribe broad outcomes or goals. The firm works with its companies to establish goals that make sense for their specific business, often helping the companies move toward businesses that look like their customer base from the earliest stages of the company. Kapor Capital’s experience with the Founders’ Commitment demonstrates several lessons. First, diversity and inclusion initiatives are good for business. Ensuring that companies emulate their customers allows them to better understand and target consumers’ needs. Second, investors looking to drive change in portfolio companies should not be overly prescriptive or rigid in setting diversity goals. The most significant impact is embedding the value of diversity and inclusion in the company’s DNA, which can be achieved through various goals or targets. GPs can work with their portfolio companies to tailor goals to the needs of the business at hand (e.g., the diversity of its customer base). Investors have tremendous opportunity to give guidance and best practices on diversity and inclusion initiatives, but only if they have built an inclusive culture and a team from diverse backgrounds. Firms interested in reaping the benefits of greater diversity in their portfolio companies should make efforts to educate and share their experiences across their portfolio companies. “We long ago came to the conclusion that retrofitting a culture of diversity into a big, established company is far more difficult than baking these values in at the startup phase. We’ll know we’ve been successful when one of these companies takes off to become the next tech giant, and the faces of its leadership and workforce reflect the diversity of our country.” FREADA KAPOR KLEIN PARTNER, KAPOR CAPITAL 89 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE consideration of gender not only risks preventing GPs from reaping “I’ve never encountered a company the benefits of improved diversity in portfolio companies, but that wanted our investment may also perpetuate gender gaps of senior leadership in later stage companies. but wouldn’t comply with our environmental requirements. Actions General Partners can take That’s not going to happen. Include ‘policies conducive to gender Affirm portfolio companies’ commitment to diversity and inclusion at time of investment. As capital allocators, GPs can diverse employment’ in the list gain commitments to gender diversity outcomes from their of requirements of potential portfolio companies from the outset, and this commitment can targets upfront and there will be take many forms. In a light touch fashion, GPs can simply ask its portfolio company CEOs to establish goals and work toward significant change.” hiring women and other underrepresented minorities at rates NASHAT MASRI higher than peers or industry averages. Lightspeed Venture PARTNER, FOURSAN CAPITAL PARTNERS Partners, for instance, asked its companies’ CEOs to sign a letter confirming that the company expects “at least one candidate from an underrepresented background be considered for every open leadership and independent board member position in the company.” When introduced in early 2018, Lightspeed asked current and new portfolio companies to sign the letter, but it was not mandatory. Other firms, such as Kapor Capital, ask portfolio companies to make commitments to practical outcomes on diversity initiatives before investing in the company. In many cases, this is driven by the fact that the GP believes that increased diversity will enable portfolio companies to make better decisions and better understand their consumers. Request and monitor sex-disaggregated data from portfolio companies. Surveyed emerging market GPs showed that most GPs do not ask for sex-disaggregated data postinvestment even though most firms believe that improving diversity would improve performance. By not requesting this data, GPs are ceding their ability to monitor gender diversity levels in their portfolio companies, track progress, and accumulate the fact base to apply pressure for further improvement. Further, this omission likely sends a signal to portfolio companies that improving gender diversity outcomes is not a large concern for the GPs. Actively pursue gender diverse talent for portfolio companies. In many cases, GPs have significant input into the candidates sourced for senior management roles and board member appointments, but few emerging market firms pursue gender diverse candidates when 90 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE identifying talent for their companies. GPs who rely on headhunting or executive search firms can hold these firms accountable for providing them a diverse slate of candidates to choose from. Several interviews of GPs revealed cases in which the PE firm rejected groups of candidates provided by headhunters because they were not sufficiently diverse. In some cases, GPs interested in helping their investees move toward gender balance will have to actively pursue gender diverse candidates, because simply relying on networks will likely be insufficient to create a diverse pipeline. The reality that it may take additional time to look outside of existing networks to find the right talent underscores the importance of GPs to look ahead and preemptively build out a pipeline of diverse candidates for potential openings. Firms waiting to source candidates once openings arose often find it difficult to find the right talent in a timely fashion. Provide guidance and feedback to portfolio companies on best practices in diversity and inclusion initiatives. GPs have visibility into different organizations, including their own, which gives these firms a unique perspective on the types of diversity and inclusion initiatives that work for companies in various industries, geographies and sizes. GPs that have established credibility on gender diversity through demonstrated action and outcomes can take these lessons to their portfolio companies to help them reach better gender balance. Interviewees suggested that GPs could drive significant change by working with portfolio companies in establishing the right goals, collecting the right data, and incorporating the necessary policies (e.g., parental leave) to build toward a more inclusive work environment. Requiring updates on progress against these goals in reports and board meetings has been helpful in ensuring the benefits persist through time. Additionally, GPs can encourage portfolio companies to provide an inclusive and safe workplace culture, by requesting portfolio companies to establish and implement anti-harassment and code of conduct policies. Organizations like the National Venture Capital Association have developed sample policies and best practices for addressing harassment and discrimination.7 Other GPs, such as General Atlantic, organize workshops with leaders from several portfolio companies from similar regions to work through common issues the company’s leaders are facing. 91 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY GENERAL ATLANTIC Embedding gender diversity in the investment and oversight process General Atlantic is a global growth equity firm that manages over $28 billion in assets. The firm focuses on investments in four global sectors: Technology, Financial Services, Healthcare and Consumer, with a team of more than 150 investment professionals, including in offices in the United States, Latin America, EMEA, China, Southeast Asia and India/APAC. The General Atlantic leadership team believes that increasing diversity would improve performance. It also views its engagement with portfolio companies as the area where the firm can have the greatest impact on closing gender gaps. The firm believes that building gender balanced leadership teams in its portfolio companies and boards will strengthen the companies’ management, decision- making, and overall performance. Furthermore, General Atlantic has found that the best leadership teams care about gender diversity and seek to partner with like-minded investors. As such, the firm believes that becoming a leader in gender diversity initiatives would help further differentiate itself to the leaders of promising investment opportunities. Given that, General Atlantic actively considers and acts to improve gender diversity throughout the investment process, from due diligence to oversight. These initiatives include: 1. Including diversity factors in the due diligence process. General Atlantic seeks to understand the diversity of executive leadership teams and board of directors when evaluating potential investment opportunities. As part of its diligence process, the firm works closely with senior management teams to share best practices on diversity and inclusion, and in some cases will make recommendations on how to better achieve diversity and inclusion outcomes as the company scales. 2. Sourcing gender diverse talent for C-Suite executives and board members. It is critical to get the right leaders in the right roles as early as possible when supporting our portfolio companies for scale. General Atlantic recognizes that building a meaningfully diverse candidate pool may require additional time and resources (e.g., to tap into new networks), and therefore proactively identifies potential executives and board members in the early stage of the investment process. This ensures General Atlantic has access to a 92 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE meaningfully diverse pool of talent, and can move with accuracy and speed when key executive vacancies need to be filled. In an effort to maintain diverse and inclusive talent in General Atlantic’s existing portfolio, General Atlantic actively tracks existing board and executive leadership composition to ensure diversity and inclusion outcomes are being achieved. 3. Hosting workshops with portfolio companies on gender diversity. Post- investment, General Atlantic is committed to gender diversity. At the end of 2018, for instance, the firm held a pilot workshop with the CEOs of its portfolio companies in Brazil to discuss diversity and inclusion, and invited leaders from a company in the region that has been successful in its own diversity efforts to share best practices. That company expressed why increasing diversity within their organization was important, what have they learned from their own process, and the impact diversity efforts have had had on their company. This sparked conversation amongst the portfolio companies about various obstacles they’ve faced trying to increase gender diversity and approaches they can use to overcome them. Following the success of this pilot program, General Atlantic plans to continue hosting similar workshops in other regions. “As industry leaders, we want to drive meaningful change in the communities in which we operate. Fostering open conversations about diversity and inclusion in the workplace is the first step to doing that. More inclusive and diverse workplaces empower employees to deliver their best, leading to better business outcomes.” BILL FORD CEO, GENERAL ATLANTIC 93 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE LIMITED PARTNERS— The survey results of this research support this view, suggesting that LPs are not collectively taking sufficient CATALYZING CHANGE IN action to influence the behavior of emerging market GENERAL PARTNERS GPs. Less than 30 percent of surveyed emerging market GPs believe their LPs view gender diversity as an important issue. This discrepancy is likely driven by Current State a lack of collective action. Surveyed GPs report being asked about gender diversity by about 25 percent LPs interviewed who have been aiming to improve of their LPs. GPs report that less than 20 percent of gender diversity have faced several obstacles. First, their LPs encourage them to improve gender diversity the mandate of LPs is primarily focused on maximizing outcomes as a condition of committing capital. However, returns for and protecting the capital of stakeholders. about 65 percent of surveyed LPs report that they view Thus, LPs may find it difficult to proactively effect gender diversity as an important consideration when change if the business case is not clearly accepted by committing capital to funds. See Figure 43, panels A–C. key decision makers, including external stakeholders. Further, LPs who have been asking GPs about gender diversity issues have encountered limits to their Implications on Limited Partners’ Interface influence when they are not part of a unified front with General Partners with other LPs. Interviewed LPs believe they can find significant strength in numbers when engaging with LPs can have tremendous influence and ability to move GPs, but many do not feel LPs have taken significant their GPs toward gender balance and drive change in collective action on this issue. the industry. As the ultimate suppliers of investment Figure 43: General Partners’ Perception of Limited Partners A. IMPORTANCE PLACED ON GENDER B. ASK ABOUT THE GENDER DIVERSITY C. ENCOURAGE ACTION AS A DIVERSITY WHEN COMMITTING CAPITAL OF THEIR INVESTMENT TEAMS CONDITION OF COMMITTING CAPITAL PERCENT PERCENT PERCENT Not important 25 None 29 None 43 (0%) (0%) Somewhat 46 Some 50 Some 41 important (~25%) (~25%) Important 19 Half 11 Half 9 (~50%) (~50%) Very important Most Most 9 (~75%) 9 (~75%) 6 A top priority 1 All All (~100%) 2 (~100%) 1 0% 25% 50% 0% 25% 50% 0% 25% 50% Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: Data reflect the perception of General Partners of the collective views and actions of Limited Partners. Based on responses from 151 emerging market General Partners. 94 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE capital for PE funds, LPs can choose the types of firms in which they would like to invest. In many cases, LPs can wield significant influence simply through the questions asked when conducting due diligence of funds raising capital. After initial investments, LPs can influence the funds’ managers through the Limited Partner Advisory Committee (LPAC), quarterly or annual general meetings, and more ad hoc or informal meetings. However, LPs do not appear to be sufficiently managing their interface with GPs if they are hoping to incentivize moving their GPs toward gender balance in both investment decision makers and portfolio company leadership. Actions Limited Partners can take Interviews of LPs, GPs, and academics suggest that LPs interested in improving diversity outcomes in GPs should not take an overly 25% of Limited Partners ask General Partners prescriptive role. Instead, interviewees suggested that LPs would about gender be most effective when “walking softly with a big stick.” In other diversity in words, LPs can establish goals and targets within the institution, due diligence clearly demonstrate that improving gender diversity is important to questionnaires the organization through the due diligence process, and continue conversations with GPs postinvestment. Establish investment goals or targets related to the diversity of one’s investments. Nearly 60 percent of surveyed LPs do not have investment goals related to gender diversity of GPs or their portfolio companies. Of the surveyed LPs who view improving gender diversity in their investments as an important priority, 47 percent do not have any goals. Goals are often a prerequisite to solving problems that require long-term solutions, because they give an “In fundraising, our firms’ gender explicit objective for organizations to work toward and a metric for progress to be assessed against. Further, they often have strong diversity hasn’t been a question. signaling effects—both internally and externally—that demonstrate There has been more media commitment to the issue. Interviews of LPs reveal several goals that attention to this in developed could be established, such as: markets, but the top questions •• Having conversations with a certain proportion of GPs on the importance of, and recommendations for, achieving from LPs are around strategy, gender balance performance, and the capabilities •• Increasing the number of GPs that provide sex-disaggregated of the team. It’s not about diversity.” data of their teams and portfolio companies •• Improving the proportion of capital that is allocated to gender JENNY LEE balanced partner teams MANAGING PARTNER, GGV CAPITAL •• Increasing the percent of capital that is invested in female entrepreneurs or gender balanced teams by GPs •• Only investing in GPs with gender diverse investment teams 95 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY ANDRA AP-FONDEN Establishing goals for gender diversity Andra AP-fonden (AP2) is one of northern Europe’s AP2 maintains the annual Female Representation Index largest pension funds and a leader in sustainable that measures the percentage of women represented on investing. AP2 manages about 335 billion Swedish the boards and executive management positions of publicly krona (US$36 billion) and is invested in virtually traded Swedish companies. The fund uses this index to every asset class and market. Its average annual real provide a fact base that can promote informed debate returns for the last 10 years (2009–18) have averaged on the representation of women in corporate leadership 8.8 percent. The Second AP Fund is convinced that positions, which can then be used to drive broader change. it can only achieve its mandate of high long-term returns at low risk, if considerations on sustainability AP2 makes significant effort to have conversations with its are integrated into its activities, both within the portfolio companies and PE funds, with an emphasis on organization and its investment processes. To this end, sustainability and reporting procedures. Particularly with AP2 focuses on sustainability issues related to climate, PE funds, AP2 aims to share best practices and lessons corporate governance, diversity, transparency, and learned in sustainability to ensure that its partners are reporting procedures. approaching the issues as well. The fund has found these discussions attract increased attention to AP2’s priority AP2 invests significant effort in defining, measuring, issues and are effective means of driving change. Through and transparently reporting its progress on sustainable these conversations, for instance, AP2 has increased the investment goals. Through its annual reports, AP2 percentage of PE firms that provide sustainability reports publishes quantifiable goals in priority areas (e.g., by about 10 percent in a single year (AP2 2016). diversity) and asset classes (e.g., PE), defines follow- up methods and key performance indicators, and shares annual progress against those goals. When the goals aren’t achieved, AP2 publicly acknowledges missed targets, diagnoses the root cause, and moves to improve. For instance, AP2 has established targets “The purpose of our goals is to bring attention in the following areas: and structure to the issue of gender diversity. Diversity: Increasing the share of women on Establishing goals highlights that the issue company boards where the fund is sitting on the is important, and we’re committed to doing nomination committee. something. If it is easier to measure, it is also easier to have a dialogue.” Reporting: Increasing the proportion of PE funds that submit environmental, social, and governance reports CAMILLA AXVI to 75 percent. HEAD OF PRIVATE EQUITY, AP2 96 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE Defining these goals is a first step, but they are only truly effective “The first step for Limited Partners when progress against them is measured and deviations from them that care about improving gender are candidly assessed and diagnosed. diversity in General Partners is Ask about gender diversity in the due diligence questionnaires to raise awareness and bring the (DDQs). Asking questions of GPs about the current state and conversation to the table. Ask plans for improving gender diversity in DDQs is a simple first step questions. Collect data. Simply in influencing GPs, but nearly 75 percent of LPs do not appear to be asking these questions. The types of questions that can shining light on the issue can be asked include data requests (e.g., “what is the percentage of begin to help drive change.” investment employees who are female at various levels?”) and broader strategic questions (e.g., “what is your firm doing to help SHELBY WANSTRATH attract and retain women?”). Nearly all interviewees suggest that SENIOR INVESTMENT MANAGER, asking questions would be a strong indicator to GPs that improving PRIVATE EQUITY, TRS OF TEXAS gender diversity is an important issue for LPs, particularly when LPs probe on inadequate or subpar answers. Most powerfully, acquiring the data of the answers to these questions will give LPs the fact base needed to identify firms that significantly lag peers in key gender diversity metrics, which can be used as a basis to incentive additional pressure or inform future capital commitments. Use the post-investment oversight role to continue conversations on gender diversity. LPs’ engagement on issues of gender diversity can continue after capital is committed and be reflected in the agendas of formal engagements, such as LPAC meetings, recurring general reports and meetings, and ad hoc discussions. The scope of these conversations and reports should at least be similar in nature to questions included in DDQs to track progress against certain outcomes and put continuous pressure on GPs for improvement. LPs can help their GPs achieve better outcomes by sharing best practices and lessons learned from their experiences as well as what other GPs are doing. 97 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CASE STUDY INSTITUTIONAL LIMITED PARTNERS ASSOCIATION Asking about Diversity and Inclusion in the Due Diligence Questionnaire The Institutional Limited Partners Association (ILPA) is the premier trade association for LPs in the PE asset class, representing more than 475 institutions and US$2 trillion of PE assets under management. ILPA works to maximize the performance and influence of LPs on an individual and collective basis. The organization advances the interests of LPs and their beneficiaries through research, education, advocacy, best practices and tools that enable institutional investors to better achieve their investment goals. One resource is a standardized DDQ that includes the most frequent and important questions posed by investors, which is intended to ease the administration burden incurred by LPs and GPs in the due diligence process. In September 2018, ILPA expanded its standardized DDQ to include important issues related to diversity and inclusion. The revised DDQ now includes metrics of ethnic and gender diversity and questions on policies regarding procedures in hiring, promotions, family leave, mentoring, and harassment and discrimination. The DDQ includes a template for GPs to report the gender and ethnic diversity of their employees by seniority and role. The questionnaire also covers initiatives in both GPs and their funds’ portfolio companies, including: •• Does the Firm have a formal Diversity and Inclusion policy or initiative? •• Does the Firm have a Code of Conduct that covers harassment, discrimination, and/or workplace violence? •• Does the Firm require such a Code of Conduct at its portfolio companies? •• Does the Firm have a Family Leave policy? •• Does the Firm have a formal mentorship program for minorities and/ or women? •• Does the Firm work with organizations that promote the attraction and retention of women and minorities within private equity? 98 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE •• What percentage of the Firm’s female employees were promoted in the last year? •• What percentage of the Firm’s female employees departed in the last year? • For investments made by the Firm during the last five years, what is the average percentage of female board members per company? In cases where firms answer ‘Yes’, the questionnaire asks for additional details on the policy or initiative. In cases where the firm answers ‘No’, the questionnaire generally asks whether the firm would be willing to change that outcome (e.g., develop and implement a Diversity and Inclusion policy or initiative) within one year. Incorporating elements of ILPA’s diversity and inclusion templates and questions into the due diligence process is an essential step for LPs that are interested in collectively influencing the direction of the private equity industry. The standardized nature reduces administrative burden on both GPs and LPs, while raising awareness and beginning the conversation on the critical issue of diversity. ILPA and its members believe that collecting data will yield improvement, simply by shining light on the issue and accumulating the fact base needed to have meaningful discussions. ILPA’s most recent Due Diligence Questionnaire can be found on its website, www.ILPA.org. “ILPA believes that diversity and inclusion is a strength that all stakeholders within the private equity ecosystem should embrace and promote in meaningful ways. The DDQ expansion and Code of Conduct guidance represent an opportunity for LPs and GPs to have conversations about these important issues, in the spirit of a stronger and ever-improving workplace for everyone.” STEVE NELSON CEO, ILPA 99 STEPS GENERAL AND LIMITED PARTNERS CAN TAKE TO MOVE TOWARD GENDER BALANCE CHAPTER IV NOTES 1 Level 20 is a nonprofit organization working toward the goal of improving gender diversity in the private equity industry. More information can be found at the Level 20 website, https://www. level20.org/. 2. PEWIN is an organization for senior PE leaders whose members represent institutions with more than US$2.5 trillion in assets under management (AUM). More information can be found at the PEWIN website, https://pewin.org/. 3 Sample based on 1,000 Americans. 4 Sample includes analysts, associates, managers, vice presidents, and principals. 5 Midlevel investment professionals include managers, vice presidents, and principals. 6 Early stage opportunity entrepreneurship rates are developed from GEM (2018). Early stage opportunity entrepreneurs are defined as people that own or started a business running less than 42 months (‘early stage’) and moved into entrepreneurial activities because they saw an opportunity in its pursuit as opposed to by necessity of the existing labor conditions. 7 The National Venture Capital Association is trade association for the venture community in the United States providing venture capital data, practical education, peer-led initiatives, and networking. For more information on resources to address sexual harassment, please see: https:// nvca.org/pressreleases/nvca-unveils-resources-help-address-sexual-harassment-venture- ecosystem/. 100 CONCLUSION V. CONCLUSION Women are significantly underrepresented as leaders outcomes and seeing necessary changes. LPs can make in PE/VC firms, and their lack of representation means sure that gender diversity is an important topic with that the decision-making teams allocating capital in GPs in due diligence questionnaires (DDQs), recurring emerging markets are acutely imbalanced. Our research reporting requirements, and standing Limited Partner suggests that this imbalance may not only be reducing Advisory Committee (LPAC) meetings. GPs can begin the returns of PE/VC firms, but could also be reducing creating an increasingly inclusive culture through a female entrepreneurs’ equal access to capital. clear tone at the top, which can permeate through to conversations with prospective and current female Moving the PE/VC industry toward gender balance will employees and portfolio companies. require action from both GPs and LPs, and steps can be taken today by individual organizations interested The reality of today’s gender imbalance is worrying, yet in changing the male-dominated status quo. For both organizations that have prioritized increasing gender GPs and LPs, PE/VC investors can commit to long-term diversity have made tremendous progress. Through our goals related to gender diversity outcomes, collect the research, we have showcased the benefits of making data required to track progress, and ensure that the gender balance an organizational priority and the conversation continues until gender gaps are closed. approaches that LPs and GPs have successfully used to drive change, both internally and externally. More LPs, for instance, can establish long-term commitments balanced gender representation will not be achieved to increase the proportion of PE/VC capital invested overnight, but small changes by LPs and GPs can be in gender balanced fund management teams. GPs can adopted to expedite the industry’s journey to gender aim to increase the proportion of women at all levels on balance. 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Zarya, V. 2018. “Female Founders Got 2% of Venture Capital Dollars in 2017.” Fortune (blog), January 31. http://fortune.com/2018/01/31/female-founders-venture-capital-2017. . . 107 APPENDIX A APPENDIX A: DETAILED METHOLODOGY The methodology for this research was an iterative, hypothesis driven approach that utilized four key inputs: (a) quantitative analysis; (b) interviews; (c) Advisory Panel; (d) qualitative survey responses. A description of each input and the relative sample sizes are shown in Figure 44. The following sections provide details on the quantitative methodologies, both for funds and portfolio companies, and qualitative survey responses, and explanation on results validation. Quantitative Analysis of Fund and General Partner Data ANALYSIS OVERVIEW Our quantitative analysis of PE/VC firms focused on answering two questions: •• How wide are the gender gaps within senior investment teams of GPs? •• What is the relationship between financial performance of funds and gender diversity in senior investment teams of GPs? Answering these questions required the following data: •• Basic GP information: fund name, firm name, vintage year, geography, investment strategy •• Gender diversity of the GP: name, gender, and position of employees •• Performance of the fund: net internal rate of return (IRR), net total value to paid-in (TVPI) ratio Details on the quantitative methodologies and survey responses are provided in the following sections. DATA OVERVIEW We maximized our sample of available data by aggregating information across several sources to create a comprehensive view of diversity in emerging market firms. We combined-third party databases (including Preqin and PitchBook), internal databases (including IFC and RockCreek investments), and a manual scraping of publicly available information to source gender diversity and fund performance data. Through this 108 APPENDIX A Figure 44: Overview of Iterative Research Method Quantitative analysis Interviews • Used to assess gaps, test hypotheses and study • Primary objectives included the business case Practitioner view of business case • Unique PE/VC emerging market gender and Hypotheses for drivers of low representation performance dataset from IFC, RockCreek and Recommendations for overcoming barriers other 3rd parties Case studies to showcase best practices >6,000 GPs with gender data • Interviewed >50 General Partners, Limited >700 funds with performance and gender data Partners, and gender experts across developed >5,000 PE/VC deals with CEO gender data and emerging markets >500 portfolio companies with performance • Hypotheses then tested at scale in qualitative and leadership team gender survey • Data quality checked via several methods ITERATIVE RESEARCH METHOD Advisory panel Qualitative survey responses • Provided diverse perspective and support • Primary objectives included Guidance of research through interview Test hypotheses on drivers of business case Review of key findings and gender gaps at scale • Members are senior leaders from premier Understand perceptions and how they di er institutions across gender, market, and seniority Bill Ford, General Atlantic • >500 respondents from emerging and Caren Grown, World Bank developed market PE/VC Claudia Zeisberger, INSEAD Jenny Lee, GGV Capital Runa Alam, DPI Shelby Wanstrath, TRS Texas aggregation process, we accumulated one of the largest gender data, we had performance data for more than unique data sets on emerging market firms and fund 700 PE/VC funds focused on emerging markets, which performance. Data availability guided design choices corresponded to more than 350 firms. in our key modeling decisions. Gender information was taken directly from data sources, employee salutations, name to gender mapping tables, and manual scraping. MODELING GENDER DIVERSITY Our gender gap analysis focused on senior investment Choice of Team Composition. In modeling gender professionals, which included partners, managing diversity, our first decision was on the level of the team directors, investment directors, CEOs, and founders. to consider for the analysis. We had three differentiated Noninvestment professionals, namely any positions options: (a) gender composition of the entire employee that were not investment roles, including finance, base of the GP; (b) gender composition of firm legal, accounting, human resources, investor relations, leadership and investment decision makers combined, operations and marketing, were excluded from i.e., partners, and (c) gender composition of just the the analysis. core investment decision makers, i.e., investment committee members. We explored all three options, but Our aggregated dataset for GP data included senior opted to use option B. investment professional gender data for more than 2,000 firms in emerging markets, for which we identified Looking at the composition of an entire employee base more than 10,000 senior and 6,000 midlevel investment (option A) would capture higher levels of diversity of professionals with gender. Of the firms for which we had more junior staff and the recent trend toward increasing 109 APPENDIX A gender diversity in the industry. However, this would not We chose option D, the use of normalized ratios (i.e., the adequately model diversity in decision making, which percentage of senior investment professionals who are is needed to assess the impact of diversity on financial female). Options A and B suggested that even adding performance. The coverage of datasets decreased at just one woman to the senior team was enough from lower levels of seniority in investment firms. Midlevel a diversity perspective and was significant enough a positions, such as principals and vice presidents, are change to influence decision-making dynamics within more consistently identified than junior positions, such firms, which is not in line with existing research.1 as analysts and associates. As such, looking at entire firms would not be viable from a data perspective and Option C was impractical because sizes of firms’ senior would not meaningfully reflect key decision makers in investor teams vary significantly and therefore absolute the organization. numbers would not be representative of the actual gender diversity and decision-making dynamics of the Focusing on investment committees (option C) would teams. Further, absolute numbers would not allow us to best attribute financial performance to individuals who identify female dominated teams, which would be a part chose the investments, but would not take into account of the male or female dominated group to be compared value accretion through portfolio supervision and against gender balanced teams. exits. In addition, investment committee membership is difficult to acquire data in a consistent and scalable Using option D, or normalized ratios of female senior manner and, therefore, it is not a viable option. investment professionals, raised a second modeling decision, namely, the decision on what percentage of Option B was the optimal choice, since deal sourcing, the opposite gender would be meaningful enough to portfolio management, and exit orchestration are largely suggest that decision-making teams are “sufficiently driven by partners, and data were available at this level. diverse” or gender balanced. Such a concept has not yet Also, this level is a strong proxy for investment decision been concretely established by research and was outside making and by and large, names (and therefore gender) of the scope of our research. We were not seeking to senior investment professionals are generally available. define a tipping point but, rather, assess the relationship between performance and increasing gender diversity. The Thirty Percent Coalition initiative and existing DEFINITION OF TEAM DIVERSITY literature by Calvert Impact Capital (Moran 2018) show that 30 percent is a reasonable proxy for categorizing Our second decision focused on how to model gender gender diversity. diversity and differentiate between gender balanced and male or female dominated teams. Here we had a few After the normalized ratio at the firm level was different options with respect to categorizing teams: calculated, we categorized firms into the following gender diversity categories: •• Option A: all-male teams, all-female teams, and mixed teams (defined by at least one woman) •• Male dominated, including “all male”: Percentage •• Option B: Teams with women and without of senior investment professionals who are female is women smaller than 30 percent. •• Option C: grouping based on absolute number of •• Gender balanced: Percentage of senior investment women in the team (e.g., teams with zero female professionals who are female is between 30 percent partners; teams with one to two female partners; and 70 percent. teams with three to four female partners; etc.) •• Female dominated, including “all female”: •• Option D: grouping based on percentage of women Percentage of senior investment professionals who represented in the team (e.g., 10 percent of senior are female is larger than 70 percent. investment professionals who are female) 110 APPENDIX A We also explored the impact of using other tipping points of male dominated, gender balanced, and female dominated firms. This analysis is included in the Results Validation section. MODELING FUND PERFORMANCE There are several different metrics to measure fund performance. In general, the PE/VC industry uses the following: (a) IRR, which measures the return of cash flows over time; and (b) multiples, including TVPI, distributions to paid-in (DPI) and residual value to paid-in (RVPI), which do not adjust for the time value of money. We chose to use IRR and TVPI to measure fund performance, because these metrics are in line with industry standards. There is an option for using gross or net returns for both IRR and TVPI. We chose to use net returns, which deduct management fees, fund expenses and carried interest, because accounting for fees represents a more realistic view of what is realized by LPs. DATA CLEANING AND VALIDATION As we aggregated the sources of data, we performed several steps to clean and validate the data. This included duplicate removal, Figure 45: Percent of General Partners with Gender Data by Geography and Investment Strategy A. GENERAL PARTNERS BY GEOGRAPHY B. GENERAL PARTNERS BY INVESTMENT STRATEGY PERCENT PERCENT 80% 76 72 56 40% 24 11 10 10 7 6 2 0% East South LAC ECA MENA SSA Venture Growth Buyout Real Asia Asia Capital Equity Assets Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: Large proportion of firms are multistrategy; therefore, total percentages exceed 100 percent. ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa 111 APPENDIX A standardization of fund and firm classifications in predominantly China, and growth equity and buyout geography and strategy, and third party triangulation. strategies. Note that many analyzed firms invest in multiple strategies (e.g., growth equity and buyout), We validated our dataset by assessing whether it which explains why the investment strategies exceed triangulates with the market and existing field literature. 100 percent. See Figure 45 For instance, we validated our findings on the lack of representation of female senior investment professionals For assessing the correlation between gender balance at the aggregate emerging market level against industry and financial performance, we analyzed performance reports. Our dataset is equal to or within 1–2 percentage data of more than 800 funds to develop our peer points of external research (Preqin 2017). Additionally, benchmarks and more than 730 funds with both we validated our findings of the representation of performance and gender data to assess the correlation. women as senior investment professionals within A breakdown of the more than 800 funds shows that specific emerging markets by testing the relative East Asia accounts for the largest percentage of funds representations with industry practitioners and experts see Figure 46, which is consistent with the broader through interviews. In all cases, our results largely industry trend of Chinese driven growth of PE/VC in triangulate with existing research and expert views. emerging markets. Relative to other third-party datasets, however, our data reflect a more thorough coverage of For assessing the gender gap among senior investment non–East Asian markets (e.g., Africa and Latin America) professionals, we analyzed gender data of more than and real assets given the investment portfolios of IFC. 2,000 emerging market GPs. In general, the percentage The breakdown of these funds by vintage is provided in of emerging market GPs is skewed toward East Asia, Figure 47. Figure 46: Percent of Funds with Performance Data by Geography and Investment Strategy A. FUNDS BY GEOGRAPHY B. FUNDS BY INVESTMENT STRATEGY PERCENT PERCENT 80% 46 50% 37 18 19 17 18 14 11 10 5 5 0% East South LAC ECA MENA SSA Multimarket Venture Growth Buyout Real Asia Asia Capital Equity Assets Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: Large proportion of firms are multistrategy; therefore, total percentages exceed 100 percent. ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa. 112 APPENDIX A Figure 47: Funds with Performance Data by Vintage, 2003–2018 NUMBER 150 151 75 77 63 54 54 52 47 50 44 44 43 32 24 22 19 18 13 0 <2003 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Emerging market funds Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: ECA = Europe and Central Asia; IRR = internal rate of return; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa BENCHMARKING APPROACH AND RESULTS In PE/VC, fund performance is rarely viewed in absolute terms, since macroeconomic cycles, geographies, and investment strategies can all have influence over performance. For example, all else being equal, a fund in China is unlikely to have the same performance as one in Africa, a fund invested in 2007 prior to the financial crisis is likely to have different performance than one investing in 2009 post crisis, and a VC fund will have different performance targets and results than a buyout fund. Thus, testing the relationship between diversity and performance requires controlling for variables that may explain performance differences outside of gender diversity, including vintage, geography, and investment strategy. To control for such differences, it is market practice to compare returns to a benchmark. Benchmarks for PE/VC in developed markets such as the United States are available and categorized based on (a) vintage of the fund (i.e., the year the fund started investing) to capture macro impact; (b) investment strategy (i.e., PE compared to VC compared to real assets; (c) geography (to capture local market conditions that could affect performance). The immediate choice for benchmarking fund performance was industry providers, such as Cambridge Associates. However, most 113 APPENDIX A industry providers tend to group all emerging market regions into one bucket (e.g., combining funds in China and Sub-Saharan Africa [SSA] into one benchmark), which does not control for variances driven by regional factors. Similarly, industry providers also tend to combine all PE/VC strategies into one strategy. We believe that collapsing these dimensions could potentially introduce noise into our analysis and skew results. For instance, analyzing the performance dataset by region shows significant deviations outside by geography and strategy. Our dataset also has enough data points when compared to industry benchmarks, suggesting that a benchmark could be created on our aggregated dataset, though we implemented some grouping based on observed similarities within the dataset. Hence, we created a benchmark for funds based on vintage, geography, and strategy, identifying a median return for the intersection of the three. For geography, we grouped funds based on geography of investment into East Asia, South Asia, and rest of emerging markets2. The choice to combine Latin America, the Middle East and North Africa, Sub-Saharan Africa, and other emerging markets into one category was driven by similarity in performance and availability of fund performance data. The performance differences are shown in Figure 48, which shows a clear step change in performance between East Asia, South Asia, and other emerging market funds. Figure 48: Median Net IRR by Geography for Benchmark Data PERCENT 10.9 10% 8.5 6.8 6.4 6.0 5.7 5% 5.0 0% East South LAC ECA MENA SSA Multimarket Asia Asia Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: Multimarket funds are ones that invest in several emerging market regions. ECA = Europe and Central Asia; IRR = internal rate of return; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa 114 APPENDIX A We grouped investment strategy into growth equity and buyout, VC, and real assets due to a combination of sample size constraints as well as expected similarities (and differences) in the return profiles.3 The median net IRR by investment strategy is shown in Figure 49. Finally, we controlled for differences in vintage across the funds but, unlike other benchmark variables, we did not group across the vintage years. This is in line with alternative benchmark options from industry providers. The median net IRR from across vintage years is provided in Figure 50. Our benchmark methodology, which is a view of the median performance for funds at the intersection of vintage, strategy, and geography, uses a minimum sample size requirement for each intersection to exclude funds that do not have enough peers. A median was taken to reduce effect of outliers. After making the requisite exclusions for a clean dataset, we calculated benchmarks for net IRR and TVPI for approximately 590 funds. Using these benchmarks, we calculated excess net IRR and TVPI using the difference between performance and mapped benchmarks. The distribution of excess net IRR is shown in Figure 51. The distribution shows centrality around 0 percent, which is expected when normalizing performance variables, and exhibits similarities to a bell curve or normal distribution, with long tails of outliers. Both occurrences would be expected in a proper benchmarking method, supporting our methodology. We conducted the same benchmark process for TVPI, which had similar results. Figure 49: Median Net IRR by Investment Strategy for Benchmark Data PERCENT 10% 10.1 8.3 7.8 8.0 7.1 5% 0% Venture Capital Growth Equity Buyout Real Estate Infrastructure Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: IRR = internal rate of return 115 APPENDIX A Figure 50: Median Net IRR by Vintage for Benchmark Data VINTAGE <2003 8.6 2003 11.9 2004 7.7 2005 13.5 2006 10.1 2007 7.5 2008 6.1 2009 7.3 2010 8.1 2011 10.5 2012 9.6 2013 11.3 2014 8.2 2015 12.7 >2015 -2.7 0% 5% 10% 15% Note: IRR = internal rate of return: Figure 51: Distribution of Excess Net IRR for Benchmark Data PERCENT 20% 20 20 11 11 10% 8 8 8 6 4 3 0% <-20% -20% to -15% to -10% to -5% to 0% to 5% to 10% to 15% to >20% -15% -10% -5% 0% 5% 10% 15% 20% Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: IRR = internal rate of return 116 APPENDIX A RESULTS VALIDATION: We find that using a median difference bootstrap technique, the difference between gender balanced CORRELATION OF FUND and male or female dominated funds is positive at an PERFORMANCE AND 80 percent confidence interval for teams between 30 percent to 70 percent female. However, the difference GENDER BALANCE is positive at a 95 percent confidence interval for teams between 25 percent to 75 percent female. We also We conducted uncertainty and sensitivity analysis to find that adding fund size as a variable in a quantile further contextualize and validate our findings that multivariate regression does not substantially affect gender balance is correlated with higher fund returns, conclusions and uncertainties of the correlation between though we do not claim a causal relationship. To gender balance and performance. Though fund size is quantify the uncertainty in the estimated difference significantly correlated with median returns, fund size and in median performance between gender balanced gender balance are minimally correlated. By and large, and male or female dominated funds, we used the same confidence intervals observed through median median value bootstrapping and a quantile regression difference bootstrap techniques hold with or without the technique. To assess the sensitivity of our estimate fund size variable. to key design choices (e.g., benchmark approach), we varied certain design parameters to test whether We used bootstrap confidence intervals to assess changes would yield different results in the correlation the uncertainty of the observed difference in median analysis. We largely include net IRR in this section as performance between funds managed by gender our primary performance metric, but found similar balanced and male or female dominated teams of senior results for net TVPI. investment professionals. This process uses the observed sample (i.e., the 591 funds that have excess return and gender data) as a starting point. The process then goes UNCERTAINTY ANALYSIS through the following steps: To assess the uncertainty and significance of the estimated 1. Draw a simple random sample from the original median difference between gender balanced and male 591 data points, with sample size of 591 and with or female dominated funds, we developed confidence replacement (i.e., with possibility of selecting any given data point several times). intervals through bootstrap resampling. This median difference approach is similar to a single factor regression, 2. With the sample drawn in step 1, compute the but with the advantage of not requiring significant difference in median excess returns between funds assumptions regarding the underlying data distribution, managed by gender balanced and male or female dominated teams. for instance.4 Because a significant amount of the variance in our estimate is driven by the small sample of gender 3. Repeat steps 1 and 2 numerous times (in our case, balanced funds, we also test whether expanding or 10,000), recording the difference in medians with contracting our gender balanced boundaries substantially each simulation. affects the estimated difference and its uncertainty. 4. From the simulated distribution of differences in While our dependent variable, excess returns, controls medians, derive the confidence interval. for vintage, geography, and strategy, it does not control for fund size (a common variable in other research) In the final step, there are several options for confidence (Lerner et al. 2019). As such, we used a multivariate interval calculation, most common being basic, quantile regression to test whether the introduction of percentile, normal, and bias-corrected and accelerated. A fund size would affect the observed correlation between comparison of the expected accuracy of these estimates excess returns and gender balance and the certainty of for our dataset through a separate simulation study5 the estimate. prompted us to use percentile as the primary confidence 117 APPENDIX A interval estimate (given its simplicity and relative performance compared with the other simple estimates, basic and normal), and bias-corrected and accelerated as a challenger (given its superior accuracy). To assess the impact that our definition of gender balance and varying sample sizes have on the estimate variance, we ran bootstrap simulations under three definitions of gender balance: •• Less inclusive: 33 percent to 67 percent •• Baseline: 30 percent to 70 percent •• More inclusive: 25 percent to 75 percent Figure 52 shows the histogram of the 10,000 random samples when defining gender balanced teams as having between 30 percent and 70 percent senior investment professionals who are women. The distribution of bootstrapped resampled populations is centered around the point estimate of 1.7 percentage point difference between gender balanced and male or female dominated funds. The high variance of the parameter is primarily driven by the relatively few number of funds in the baseline definition (n = 46 balanced funds), Figure 52: Median Difference of Baseline Gender Balance Definition Histogram from Bootstrapped Simulations NUMBER 2,400 1,600 800 0 <-3.6 -3.6, -3.1, -2.6, -2.0, -1.5, -1.0, -0.5, 0, 0.6, 1.1, 1.6, 2.1, 2.6, 3.2, 3.7, 4.2, 4.7, 5.2, 5.8, >6.3 -3.1 -2.6 -2.0 -1.5 -1.0 -0.5 0 0.6 1.1 1.6 2.1 2.6 3.2 3.7 4.2 4.7 5.2 5.8 6.3 DIFFERENCE IN MEDIAN PERCENTAGE POINTS Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: Data reflect median difference of 10,000 samples. 118 APPENDIX A and is reduced when the definition of gender balance is BCa methods are by and large similar across methods expanded to between 25 percent and 75 percent (n = 74). for each gender balance range, identifying positive differences at the same confidence levels. Table1 summarizes the results of the bootstrapped samples, including percentiles of the median difference We used a quantile multivariate regression to test in excess returns for each definition of gender balance. whether including fund size as a variable would affect Additionally, it shows percentile-based confidence the estimated difference in median performance and its intervals from the bootstrap samples. The percentile uncertainty. The quantile method was used as opposed bootstrap method suggests that the less inclusive to an ordinary least squares (OLS) regression, because (33 percent to 67 percent) and baseline (30 percent to a Cook’s distance test showed a substantial number of 70 percent) median excess return differences between outliers with high influence in the OLS model, which was gender balanced and gender dominated funds are reduced with the quantile regression. Using the quantile positive at an 80 percent confidence interval. For regression allowed us to analyze median differences, the more inclusive (25 percent to 75 percent) case, which is consistent with our broader approach. We used the median excess return difference is positive at a a bootstrap method to obtain confidence intervals (CIs) 95 percent confidence interval Quantitative analysis of for the quantile regression coefficient as a distribution- portfolio company data. agnostic alternative to the typical standard error and p-value estimates. Though the percentile bootstrap method is simple, the coverage error of the estimate can be high if the As shown in Table3, the estimated median difference distribution of the bootstrap estimates is not nearly between gender balanced and male or female symmetric "(Carpenter and Bitchell (1999)". To address dominated funds is similar with or without fund size. the shortcomings of the percentile method, we also This finding is supported by the fact that the correlation estimated bootstrap confidence intervals using the bias between the gender balance and fund size variables corrected and accelerated (BCa) method. The 80th, are minimal.6 The confidence intervals of the estimated 90th, and 95th percentile confidence intervals using the differences using the BCa method are also provided, BCa method are included in Table 2. The significance generally suggesting tighter confidence bands with the of the confidence intervals between the percentile and introduction of fund size. Our hypothesis is that moving Table1: Bootstrap Resampling Results for Different General Partner Diversity Levels GENDER BALANCE OBSERVED DISTRIBUTION RESAMPLED DISTRIBUTIONS (N=10,000) RANGE (%) Confidence intervals (CIs) (%) Median Count difference (%) Std. dev. (%) Median 80% 90% 95% 33 – 67 42 1.71 1.48 1.68 [0.2, 4.0] [-0.2, 4.7] [-0.8, 5.0] 30 – 70 46 1.72 1.47 1.69 [0.2, 4.0] [-0.2, 4.7] [-0.8, 5.0] 25 – 75 74 1.85 1.14 1.85 [0.8, 3.7] [0.6, 4.5] [0.2, 4.9] Positive difference in medians Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: The bootstrap resampled distributions and confidence intervals were developed using R’s “boot” package. More information can be found at this website, https:// cran.r-project.org/web/packages/boot/boot.pdf. 119 APPENDIX A Table 2: BCa Confidence Intervals for Median Difference in Gender Balanced vs. Male/Female Dominated Funds’ Excess Returns GENDER BCa CONFIDENCE INTERVALS (CIs)(%) BALANCE RANGE(%) 80% 90% 95% 33 – 67 [0.4, 4.2] [-0.1, 4.8] [-0.5, 5.1] 30 – 70 [0.3, 4.2] [-0.1, 4.8] [-0.6, 5.1] 25 – 75 [0.8, 3.7] [0.6, 4.5] [0.2, 4.9] Positive difference in medians Note: BCa = bias corrected and accelerated. Table 3a: Median Difference Estimate and BCa Confidence Intervals in Fund Size Quantile Regression GENDER BALANCE OBSERVED (WITHOUT GENDER BALANCED VARIABLE (QUANTILE REGRESSION) RANGE (%) FUND SIZE) Confidence (CIs) using BCa method (%) Median Median difference (%) difference (%) 80% 90% 95% 33 – 67 1.71 1.71 [1.2, 6.3] [0.8, 7.0] [-0.2, 7.4] 30 – 70 1.72 1.76 [1.1, 5.5] [0.6, 6.1] [0.1, 6.5] 25 – 75 1.85 1.91 [0.4, 2.6] [-0.1, 3.0] [-0.5, 3.6] Table 3b: Median Difference Estimate and BCa Confidence Intervals in Fund Size Quantile Regression GENDER BALANCE FUND SIZE VARIABLE (IN, QUANTILE REGRESSION) RANGE (%) Confidence intervals (CIs) using BCa method (%) Coefficient 80% 90% 95% 33 – 67 -0.005 [-0.0085, -0.007] [-0.0094, -0.0002] [-0.0108, .0004] 30 – 70 -0.005 [-0.0093, -0.0012] [-0.0106, -0.0006] [-.00122, -0.0002] 25 – 75 -0.005 [-0.103, -0.0020] [-0.0121, -0.0021] [-0.0132, -0.0007] Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: Note that the sample size of funds decreased to 556, because the fund size variable was not available for the full set of 591 funds with excess return and gender data. BCa = bias corrected and accelerated. 120 APPENDIX A toward gender balance would be positively correlated another but rather to assess the extent to which the with returns, which our results support. We do not seek observed relationship is a function of our design choice. to define the right tipping point for being sufficiently To maintain consistency in the observed sample, we gender balanced, because the biases embedded within used the same set of 591 funds to analyze absolute the fact base (e.g., the lack of senior investment teams returns and Cambridge Associates’ benchmarks based that are gender balanced) could bias any such analysis. on vintage, where applicable.7 The positive relationship Nor does this analysis establish a causal relationship. between gender balanced and higher performance has However, the positive correlation between gender held in terms of direction and magnitude regardless of balance and performance suggests that there are likely the benchmark method used (our calculated approach benefits to be reaped over time by becoming more compared to Cambridge Associates’) or if we looked at gender balanced. absolute returns. The assumptions highlighted in Table 4 reflect our base case model. SENSITIVITY ANALYSIS Our approach does not make restrictions on fund vintages, opting to include as much performance data To assess the impact of our benchmark approach on as are available given the relative scarcity. However, we our findings, we calculated the difference between did a similar sensitivity analysis to assess the impact of gender balanced and male or female dominated different vintage year cut-offs (none, after 2000, before funds using two different options: (a) using absolute 2015, and both) would have on the median performance returns: no benchmark methodology is applied; and differences for excess net IRR and TVPI. The funds of (b) using Cambridge Associates’ benchmark: a third- gender balanced investment teams outperformed the party methodology that groups emerging markets by funds of male or female dominated teams, though the geographies and investment strategies. The purpose degree of the outperformance varied slightly. The results of this analysis is not to validate one option relative to are shown in Table 5. Table 4: Performance Comparison Across Benchmark Options Limited to the population of funds with a calculated benchmark (n = 591) NO BENCHMARK CALCULATED BENCHMARK CAMBRIDGE ASSOCIATES (EXCESS) BENCHMARK (EXCESS) Median net IRR difference (gender +2.15% +1.72% +1.74% balanced vs. male/female dominated) Median TVPI difference (gender balanced +0.25x +0.18x +0.36x vs. male/female dominated Baseline assumptions Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: Limited to the population of funds with a calculated benchmark (n = 591). The number of funds differs across methodologies because our calculated benchmark requires a minimum sample of funds to develop a peer group. When applying this minimum peer sample requirement, 143 funds do not have enough peers at the intersection of geography, investment strategy, and vintage year to create a benchmark. This is the difference between “no benchmark” and “calculated benchmark.” Cambridge Associates’ benchmark in emerging markets, however, is simply defined by vintage, so most of the funds analyzed have benchmarks. IRR = internal rate of return; TVPI = total value to paid-in. 121 APPENDIX A We also tested the performance difference between gender balanced and male or female dominated teams at various percentiles (e.g., 25th percentile, 50th percentile or median, and 75th percentile) for both excess net IRR and TVPI. The results are shown in Table 6 and Table 7. In general, the positive correlation between gender balance and performance holds, though there is an exception at the 75th percentile for net IRR. However, the observed sample sizes of gender balanced funds are small, which yields high uncertainty in performance difference estimates. This analysis suggests that Table 5: Performance Comparison across Vintage Year Cut-Offs NO CUT-OFF AFTER 2000 BEFORE 2015 BETWEEN 2000 AND 2015 Number of funds 591 569 546 524 Median net IRR difference (gender 1.7% 1.5% 1.8% 1.5% balanced vs. male/female dominated) Median TVPI difference (gender balanced +0.18x +0.18x +0.20x +0.19x vs. male/female dominated) Source: Aggregated PE/VC datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: IRR = internal rate of return; TVPI = total value to paid-in Baseline assumptions Table 6: Percentile Comparison for Excess Net Internal Rate of Return (IRR) 25TH PERCENTILE MEDIAN 75TH PERCENTILE Gender balanced -5.6% 1.7% 6.6% Male/female dominated -6.5% -0.1% 7.0% Difference +0.8% +1.7% (rounding) -0.4% Baseline assumptions Note: IRR = internal rate of return. Table 7: Percentile Comparison for Excess Total Value to Pain-in (TVPI) Multiple 25TH PERCENTILE MEDIAN 75TH PERCENTILE Gender balanced -0.19x +0.17x +0.58x Male/female dominated -0.26x -0.01x +0.24x Difference +0.07x +0.18x +0.34x Baseline assumptions Source: Aggregated Private Equity and Venture Capital datasets from International Finance Corporation; PitchBook; Preqin; RockCreek; and other publicly available datasets. Note: TVPI = total value to paid-in. 122 APPENDIX A performance differences would need to approach recorded information for portfolio companies at an event 1.7 percentage points or higher to be meaningful even of liquidity (including any funding round, exit, or initial at 80 percent confidence intervals in the base case public offering [IPO]). scenario. As such, differences outside of the median estimate are even less likely to be meaningful. CEO and founder information are available on the majority of portfolio company deals, but information of company senior leadership teams is not available from QUANTITATIVE ANALYSIS our aggregated dataset. We manually scraped leadership team information for all portfolio companies, including OF PORTFOLIO CEO and founder information when such information was COMPANY DATA not available. A breakdown of the final dataset of 5,400 deals for which CEO or founder data are available is shown in Figure 53. ANALYSIS OVERVIEW When defining the senior leadership teams of the Our analysis of portfolio companies focused on answering companies, we included CEOs, founders, other C-Suite two questions: executives, managing directors, presidents, board chairmen, directors, and vice presidents. To identify •• How wide are the gender gaps within senior the gender of employees, we used a name and gender leadership teams in portfolio companies? mapping database to map employee names to male, •• What is the relationship between performance female, and unisex. In cases where an employee’s name and gender diversity in senior leadership teams of was identified as unisex, we manually scraped for their portfolio companies? gender. To answer these questions, we needed the following types of data: MODELING GENDER DIVERSITY •• Basic portfolio companies information: company We use CEO and founders to model gender diversity for name, deal type, geography, deal size (i.e., funds assessing gender gaps in access to capital and senior raised), deal date leadership teams. In short, using CEOs and founders •• Gender diversity: name, gender, and position of gave us a much larger sample size to analyze, but would employees at portfolio companies not give a strong proxy for gender balanced compared to •• Performance: valuation, valuation data male or female dominated teams, because a significant portion of the CEO and founder data only have one Our analysis of portfolio companies focused on answering identified leader. two questions: One key decision was how to model gender diversity and differentiate between gender balanced and male DATA OVERVIEW or female dominated teams. Similar to the GP analysis, we use normalized ratios (e.g., the percentage of senior We maximized our sample of available data by leaders who are female) as opposed to absolute numbers aggregating information across several sources to (e.g., more than three women). We use 30 percent as the create a comprehensive view of portfolio companies. We tipping point to define gender balanced senior leadership combined third-party dataset PitchBook, internal data teams. The rationale for these choices is by and large from IFC, and manually scraped publicly available data. similar to what was described in the GP section. We also The data we aggregated were at the deal level, which explored other tipping points of male dominated, gender 123 APPENDIX A Figure 53: Portfolio Companies by Geography and Deal Type A. GEOGRAPHY B. DEAL TYPE PERCENT PERCENT 40% 31 27 26 20% 19 19 15 14 14 12 8 9 5 1 0% East South LAC ECA MENA SSA Accelerator/ Seed Early Later Growth Buyout Real Asia Asia Incubator Round Stage VC Stage VC Equity Assets Sources: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data Note: ECA = Europe and Central Asia; LAC = Latin America and the Caribbean and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa; VC = venture capital. balanced, and female dominated leadership teams, which performance. Valuation increases, on the other hand, are shown in the following sensitivity analysis section. are generally available in relation to individual deals and transactions. Though valuation increases are not direct measures of financial performance, because they do MODELING PERFORMANCE not include distributions or cash flows and could also encompass unrealized gains, using this data would allow In general, there are various metrics that can be used us to expand our scope to a broader portfolio of emerging to measure the performance of portfolio companies. market PE/VC investments as opposed to the portfolios of These metrics include but are not limited to: financial a handful of GPs. return metrics, including IRR; financial growth metrics, including growth in revenues; earnings before interest, We assessed median changes in valuation between two tax, depreciation, and amortization (EBITDA); or valuation rounds of liquidity for gender balanced versus male or increases, including changes in company value between female dominated senior leadership teams. The valuation multiple rounds of liquidity, including any funding round, change was calculated for each company that had two or exit or IPO. more liquidity rounds, in which the valuation of the latest deal was divided by the valuation of the earliest deal to In general, financial return and growth metrics are reliable calculate the “step-up” (or change) in valuation. proxies for the performance of portfolio companies; however, those data are rare and generally not available at significant scale. In nearly all cases for private companies, BENCHMARKING APPROACH AND RESULTS this would require access to the portfolios of PE/VC firms, which would limit available data and potentially bias Similar to our analysis of GP funds, we calculated the sample. benchmarks to control for variables that could explain performance differences outside of the gender diversity We use valuation increases between multiple rounds of the portfolio company’s leadership team. For portfolio of a liquidity as our proxy for portfolio company companies, variables that could be expected to correlate 124 APPENDIX A with performance changes include macroeconomic factors, such as the year and region in which the investment is made, and the length for which an investment is held. As such, we conducted two transformations to normalize the changes in valuation between rounds of liquidity and control for other factors. We looked at compounded annual growth rates (CAGRs) of the changes in valuation based on the dates of the first and final investment. This allowed us to control for differences in holding periods, in which a company whose valuation increased by 60 percent over five years would be viewed as less successful than another company whose valuation increased by the same rate over two years. We developed peer groups at the intersection of geography and year of investment to control for macroeconomic factors. Defining “like” groups allowed us to develop a view of expected company performance based on forces separate than gender diversity. We used the median CAGR for portfolio companies at each intersection, but applied a minimum sample size requirement to create peer groups. This allowed us to create a view of “excess valuation increases,” by taking the difference between the CAGR of an individual company and its peer group. Figure 54: Annualized Company Valuation Increases by Region and Initial Investment Year A. REGION B. INITIAL INVESTMENT YEAR PERCENT PERCENT 40% 31 29 27 25 24 20% 19 19 19 14 12 9 9 7 0% East South LAC ECA MENA SSA 2011 2012 2013 2014 2015 2016 2017 Asia Asia Sources: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data Note: ECA = Europe and Central Asia; LAC = Latin America and the Caribbean and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa. 125 APPENDIX A The geographic regions used for benchmarking were included East Asia, South Asia, LAC, ECA, MENA, and SSA. The annualized valuation changes by region and initial investment year are shown in Figure 54. This demonstrates significant variance not only by region but also timing of the investment, which supports controlling for these variables. We applied a minimum sample size requirement for each intersection of geography and vintage to exclude portfolio companies that did not have a reasonable number of peers to define a benchmark. A median was taken to reduce effect of outliers. After making the requisite exclusions for a clean dataset, we were able to calculate benchmarks for annualized valuation increase for 414 portfolio companies. After determining benchmarks for each portfolio company, we calculated excess annualized valuation increase using the difference between the portfolio company and its benchmark. The distribution of excess annualized valuation changes is shown in Figure 55. Overall, the distribution shows a slight bias toward companies with higher valuations; however, the median excess returns of the distribution is 0 percent. Figure 55: Distribution of Excess Annualized Valuation Increase PERCENT 20% 19 15 13 11 11 10% 7 7 7 6 4 0% <-40% -40% to -30% to -20% to -10% to 0% to 10% to 20% to 30% to > 40% -30% -20% -10% 0% 10% 20% 30% 40% Source: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data 126 APPENDIX A RESULTS VALIDATION: CORRELATION OF PORTFOLIO COMPANY VALUATION INCREASES AND GENDER BALANCE UNCERTAINTY ANALYSIS across the new distributions to quantify uncertainty and confidence intervals of the original estimate. Figure 56 Similar to our analysis on the performance of funds of shows the distribution of these 10,000 random samples GPs, we used bootstrap confidence intervals to assess when defining gender balanced teams as having between the uncertainty of the observed difference in median 30 percent and 70 percent senior managers who are performance between portfolio companies with women. gender balanced and male or female dominated senior leadership teams. An overview of bootstrapping with Similar to our analysis of fund performance, we expected replacement is provided in the fund performance results high variance within the estimate given small sample validation section. sizes of gender balanced portfolio companies. The distribution of portfolio company returns are generally For portfolio companies, we generated 10,000 resampled more dispersed than funds. Since our hypothesis is that distributions, calculated the difference in medians for each moving toward gender balance would be positively of those populations, and calculated summary statistics correlated to returns, we expected that median excess (e.g., standard deviations, 10th to 90th percentiles, 5th returns of gender balanced sets (e.g., 25 percent to to 95th percentiles, and 2.5th to 97.5th percentiles) 75 percent) would still be higher than the median Figure 56: Distribution of Differences in Median Excess Valuation Changes for Portfolio Companies from Bootstrapped Simulations NUMBER 2,400 1,600 800 0 <-3.8 -3.8, -2.5, -1.2, 0.1, 1.4, 2.7, 4.0, 5.3, 6.6, 7.9, 9.2, 10.5, 11.8, 13.1, 14.4, 15.7, 17.0, >18.3 -2.5 -1.2 0.1 1.4 2.7 4.0 5.3 6.6 7.9 9.2 10.5 11.8 13.1 14.4 15.7 17.0 18.3 DIFFERENCE IN MEDIAN PERCENTAGE POINTS Sources: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data Note: Median is based on 10,000 samples 127 APPENDIX A Table 8: Bootstrap Resampling Results for Different Portfolio Company Diversity Levels GENDER BALANCE OBSERVED DISTRIBUTION RESAMPLED RANGE (%)” (PERCENTILE DIFFERENCE OF GENDER BALANCED VS. MALE/FEMALE DOMINATED) Percentile confidence intervals (CIs) Median Count diff. (%)” Std. dev. (%) Median (50%) 80% 90% 95% 33 – 67 81 5.50 3.80 5.55 [0, 9.7] [-0.3, 11.1] [-0.7, 13.7] 30 – 70 82 5.49 3.84 5.67 [0, 9.7] [-0.4, 11.2] [-0.8, 13.8] 25 – 75 108 5.57 4.07 5.71 [0, 10.2] [-0.3, 11.9] [-0.1, 15.0] Positive difference in medians Sources: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data performance of male or female dominated teams. Table 8 using two different options: (a) using absolute returns shows the results of the bootstrapping analysis for i.e., no benchmark methodology is applied; and (b) portfolio companies using the percentile method. The using Cambridge Associates’ benchmark: i.e., a third- median difference in excess returns for gender balanced party methodology that defines peers by vintage and portfolio companies at 33 percent to 67 percent and geographic region, but uses IRR metrics. To maintain 30 percent to 70 percent at an 80 percent confidence consistency in the observed sample, we used the same interval. Thus, though our estimates suggest that there set of 414 portfolio companies to analyze absolute could be a positive correlation between gender balance returns and Cambridge Associates’ benchmarks based and increased performance in portfolio companies, there on vintage and geography. The positive relationship is a considerable level of uncertainty in the estimate at all between gender balanced and higher performance definitions of gender balanced. held in terms of direction and magnitude regardless of the benchmark method used (our calculate approach Similar to our analysis of fund performance in GPs, we compared to Cambridge Associates’) or if we looked calculated confidence intervals using the BCa approach. at absolute returns. The assumptions highlighted in The results are shown in Table 9. These results largely Table 10 reflect our base case model. confirm the uncertainty of the median performance difference between gender balanced and male or female We also analyzed the impact of the percentile used on dominated portfolio companies observed using the the correlation between gender balance and excess percentile method. annualized valuation increases. For portfolio companies, gender balanced leadership teams outperformed male To assess the impact of our benchmark approach on or female dominated firms at the 25th, 50th (median), our findings, we calculated the difference between and 75th percentiles. See Table11 gender balanced and male or female dominated funds 128 APPENDIX A Table 9: BCa Confidence Intervals for Median Difference in Gender Balanced vs. Male/Female Dominated Portfolio Companies’ Excess Valuation Changes GENDER BALANCE BCa CONFIDENCE INTERVALS (CIs) (%) RANGE (%) 80 CI 90 CI 95 CI 33 – 67 [0, 9.4] [-0.4, 10.1] [-1.1, 13.1] 30 – 70 [0, 9.3] [-0.4, 10.6] [-1.2, 12.6] 25 – 75 [0., 9.9] [-0.4, 11.3] [-1.2, 14.0] Sources: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data Note: BCa = bias corrected and accelerated Table 10: Performance Comparison across Benchmark Options Percent NO BENCHMARK CALCULATED BENCHMARK CAMBRIDGE ASSOCIATES (EXCESS) BENCHMARK (EXCESS) Difference in median annualized +5.6% +5.5% +9.7% valuation change between balanced & dominated companies Baseline assumptions Source: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data Note: Limited to the population of funds with a calculated benchmark (n = 414). Table 11: Performance Comparison at Different Percentiles Percent 25TH PERCENTILE MEDIAN 75TH PERCENTILE Gender balanced -10.5% 5.4% 29.0% Male/female dominated -21.1% -0.1% 26.7% Difference +10.5% +5.5% +2.3% Baseline assumptions Source: Aggregated datasets from International Finance Corporation, PitchBook and publicly available data 129 APPENDIX A QUALITATIVE SURVEY •• Firm type, including LP (e.g., sovereign wealth fund, fund of funds) and GP (e.g., venture capital, growth equity, buyout) Survey overview Respondents who did not indicate that they worked for We launched a survey on gender diversity in PE/VC a LP or GP were screened out from the rest of the survey. in emerging markets to answer several qualitative key These responses were then used to tailor specific question questions at scale: paths that would be most relevant to the respondent. Additionally, respondents whose response time was less •• What are the most significant drivers of gaps in than the 2.5th percentile were screened out for quality female representation as partners in PE/VC firms and control purposes. The percentile cutoff was applied recipients of those firms’ capital? depending on the respondents’ question path, because •• How do GPs support gender balance in organizational the length of the survey varied with the respondents’ culture, talent management (i.e., applications and profile. recruitment, hiring, retention, and promotion) and investment processes (e.g., deal sourcing, investment One consideration for respondent screening was whether decision making, and post-investment oversight)? to include partial responses (when respondents did •• What is the stance and actions of LPs on gender not complete the full survey). It is common for survey diversity issues, and how are these actions being respondents to not complete the full questionnaire for perceived by GPs? several reasons, including survey respondents getting •• Are there differences in perceptions of male distracted or finding the survey topic to be one they are and female junior PE/VC investors regarding not particularly interested in. In our case, 12 percent of their likelihood to remain in PE/VC for the our valid survey responses were partial responses. foreseeable future? The tradeoffs and best practice regarding the inclusion of The survey was disseminated through email from a list of partial responses in survey analysis is still a topic under third-party data, publicly available sources, and industry debate; however, we opted to include partial responses associations. Survey recipients covered both emerging in our analysis to reduce the bias of topic salience. For and developed markets, with significant representation instance, respondents who did not complete the survey from all emerging market regions. may be less interested in the topic of gender diversity, and therefore may hold different views on the business case. If there were a bias in the partial respondent population, RESPONDENT SCREENING including partial responses could therefore ensure a more representative sample of the target survey population, We received 696 responses from industry participants. even though this would apply only for a portion of However, we included several filters to ensure relevance the survey. of the respondents’ experience. The survey included profile questions that allowed us to define the following Including partial responses increased our sample characteristics of each respondent: size without meaningfully changing our findings. We compared results of including or excluding partial •• Geographic region, including base location and areas responses for analyses in both talent management and invested in investments, and two results have been usually within •• Focus of role, including investment compared to 5 percent difference from each other. Respondent profiles noninvestment (e.g., investor relations) of partial compared to complete responses are largely •• Seniority, including managing partners, partners, similar in terms of gender, geography, and position, principals, and associates which indicates that respondent demographics are 130 APPENDIX A largely aligned in both groups. As such, there is not a aggregating them. This is particularly important on strong indication that the partial compared to complete questions including the business case and drivers of low response populations are meaningfully different. female representation in PE/VC, where differences in gender meaningfully changed responses. The divergence In the end, we had 504 responses that were valid has led to important revelations about the difference in (i.e., passed all filters). Emerging market respondents perceptions and gaps between the two gender groups, accounted for about 53 percent of total valid responses.8 as well as uncovering “market wisdom” that may have We focused on analyzing emerging market responses largely been driven from a male lens. Additionally, using for the purposes of our research, but also analyzed a weighted aggregation would introduce additional the response differences across developed and subjectivity and assumptions into the analysis, which we emerging markets. opted to avoid. For questions that are more descriptive about firm Emerging Market Respondent Profile policies as opposed to about perceptions of drivers of existing gender gaps in PE/VC, we show our findings Of 267 valid emerging market responses, 30 percent in aggregate. Responses to these questions were of respondents are female and 19 percent of senior much more driven by the firm than the gender of the respondents9 are female, which is a higher proportion respondent. See Table12. of female partners than what is currently in emerging market PE/VC firms (11 percent). The difference indicates The second potential bias in our sample was geography. that women are slightly overrepresented in our survey We asked survey respondents to identify the country respondents, which could introduce bias into our sample. they are based in and used the result to categorize them into regions. A comparison of the geography distribution We controlled for this bias by showing the divergence of survey recipients from our mailing list and the survey between male and female respondents as opposed to respondents shows that among emerging markets, Table 12: Valid Responses by Seniority and Gender from Emerging Markets within General Partners and Limited Partners SENIORITY MALE (COUNT) FEMALE (COUNT) FEMALE (PERCENT) TOTAL Managing partner and/or Founder 96 19 17 115 (43%) Partner 42 13 24 55 (21%) Principal 27 14 34 41 (15%) Junior (including Vice President, 14 23 61 38 (14%) Associate, and Analyst) Other 8 10 56 18 (7%) Total 187 79 30 267 (100%) Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018. 131 APPENDIX A South Asia, LAC, and SSA have been overrepresented in our sample. However, our analysis suggests that potential biases in responses across geography are small, particularly relative to gender, given that gender is a much larger driver of divergence in survey results compared to geography, the bias introduced is potentially small, uncovering “market wisdom” that may have largely been driven from a male lens. See Figure 57. Additionally, using a weighted aggregation would introduce additional subjectivity and assumptions into the analysis, which we opted to avoid. Seventy-five percent of respondents indicate they invested primarily in emerging markets, either exclusively in emerging markets or a mix of emerging and developed markets. Similar overrepresentation was observed in South Asia, LAC, and SSA in our sample. See Figure 58. Eighty-four percent of emerging market respondents worked at investment-type roles, the target population for our analyses. See Table13. Figure 57: Share of Emerging Market Survey Respondents by Geography PERCENT 40% 34 27 26 20% 20 19 16 13 11 11 9 8 6 Potential respondents 0% Survey respondents East Asia South Asia LAC ECA MENA SSA Source: International FInance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018 Note: ECA = emerging Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa. 132 APPENDIX A Figure 58: Survey Respondents by Primary Investment Location PERCENT 50% 43 29 25% 23 18 17 13 11 8 6 0% China East Asia, India South Asia, LAC ECA MENA SSA Developed excluding China excluding India Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018 Note: Percentages do not add up to 100 percent because GPs can list more than one primary investment location. ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = Sub-Saharan Africa. Includes respondents based in developed and emerging markets. Table 13: Emerging Market Survey Respondents by Role and Gender ROLE MALE FEMALE TOTAL INVESTMENTS 155 (88%) 54 (74%) 209 (84%) OPERATIONS 12 (7%) 2 (3%) 14 (6%) INVESTOR RELATIONS/ 4 (2%) 9 (12%) 13 (5%) MARKETING ENFIRONMENTAL, SOCIAL, AND – 3 (4%) 3 (1%) GOVERNANCE COMPLIANCE HUMAN RESOURCES – – – FINANCE/ACCOUNTING 3 (2%) 1 (1%) 4 (2%) LEGAL 1 (1%) 1 (1%) 2 (1%) OTHER 2 (1%) 3 (4%) 5 (2%) TOTAL 177 (100%) 73 (100%) 250 (100%) Source: IFC Gender Diversity in Private Equity and Venture Capital Survey 2018. Note: — = not applicable. The majority of GP respondents worked at firms that have VC, growth equity, and buyout funds with firm assets under management under US$1 billion. Respondent firms can be multistrategy, and therefore percentages of general partners add up to larger than 100 percent. Most LP respondents work at fund of funds and development finance institutions or multilateral development banks with firm assets under management under US$100 billion.10 See Figure 59, panels A and B, and Figure 60. 133 APPENDIX A Figure 59: Percent of General Partners by Assets Under Management and Investment Strategy A. ASSETS UNDER MANAGEMENT US$ B.INVESTMENT STRATEGY PERCENT PERCENT 0 to 250 MM 68 Buyout 21 Growth Equity 63 250 MM to 1 BN 20 Venture Capital 45 1 BN to 5 BN 10 Infrastructure 3 5 BN to 10 BN 1 Real Estate 6 10 BN to 25 BN 1 Other 6 0% 40% 80% 0% 40% 80% Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 2018 Figure 60: Percentage of Limited Partners Firms by Assets Under Management and Investment Strategy A. ASSETS UNDER MANAGEMENT US$ B. INVESTMENT STRATEGY PERCENT PERCENT Development finance 0 to 1 BN 42 institution or multilateral 19 development bank Endowment 0 1 BN to 10 BN 19 Family Office 14 10 BN to 25 BN 14 Foundation 0 25 BN to 100 BN 18 Fund of funds 53 100 BN to 250 BN 0 Pension fund 7 > 250 BN 7 Sovereign 7 Wealth Fund 0% 40% 80% 0% 40% 80% Source: International Finance Corporation Gender Diversity in Private Equity and Venture Capital Survey 201 134 APPENDIX B APPENDIX B: OVERVIEW OF EXISTING RESEARCH ON GENDER DIVERSITY AND PERFORMANCE Table 14: Summary of Existing Research on Relationship between Gender Diversity and Performance DEVELOPED EMERGING Public •• U.S. companies with gender diverse boards realized EPS gains •• EBIT margin of African companies whose boards were at least of 37% vs. -8% of non-diverse boardsa 25% female was 20% higher than industry averageg •• U.S. gender diverse boards yield higher return on assets, return •• Study of 30 Pakistani listed firms showed board diversity did not on invested capital & return on equityb significantly influence performanceh •• Mandatory quotas for female representation on boards a •• Study of 153 listed commercial banks in MENA showed negative significant drop in stock price and a large decline in Tobin’s Qc relationship between board diversity and performancei •• A meta-analysis of 20 studies on the relationship between female representation on corporate boards and firm financial performance found that the effect of greater gender diversity was small and non-significantd •• Female hedge fund managers beat industry average and have return of 59% vs. industry average of 39%e •• Morningstar found no statistically significant difference between all-male, mixed, and all-female investor teamsf Private •• US VC firms’ performance has a statistically significant positive •• Little existing research correlation with the proportion of female-led businesses that are in their portfolioj •• Calvert Impact Capital found companies in top quartile of proportion of women in leadership positions had an average return on sales of 18.1% vs. -1.9% for companies in bottom quartilek •• In VC, female-founded companies performed 63% better than all-male teams in revenue growthl •• Research found “VC firms that increased their proportion of female partner hires by 10% saw, on average, a 1.5% improvement in overall fund returns each year”m •• U.S. based funds managed by diverse-owned firms generally do not perform better or worse than non-diverse-owned firms within typically accepted statistical confidence intervals after controlling for relevant characteristicsn Note: EBIT Earnings before interest and taxes; EPS = earnings per share; MENA = Middle East and North Africa; VC = venture capital a. Eastman, Rallis, and Mazzucchelli 2016. b. Stiehler and Freedman 2016 c. Ahern and Dittmar 2012. d. Pletzer et al. 2015. e. See Financial Times website, https://www.ft.com/content/d923da76-5d1d-11e5-9846-de406ccb37f2#axzz40Vhd0awW. f. Morningstar 2018. g. Moodley et al. 2016. h. Nathan 2013. i. Sherif 2015. j. JMG Consulting and Wyckoff Consulting 2013. k. Moran 2018. l. See the First Round 10 Year Project website, http://10years.firstround.com/. m. Gompers and Kovvali 2018. n. Lerner et al. 2019. 135 APPENDIX B APPENDIX NOTES 1 Research by Moran (2018), for instance, finds that return on assets of companies in their private debt portfolio steadily increased around 30 percent when women are in senior leadership positions, peaked at approximately 50 percent, and tapered off after 70 percent. Newton-Small (2016) finds that the presence of women begins to significantly change a diverse set of institutions between 20 percent to 30 percent. Thirty percent is also in line with industry initiatives, such as the Thirty Percent Coalition 2 Rest of emerging markets includes Europe and Central Asia (ECA), Latin America and the Caribbean (LAC), MENA, and Sub-Saharan Africa (SSA). 3 Real assets includes real estate and infrastructure. 4 The bootstrap is a computer-based method that can often be used to answer questions that may be too complicated or require too many assumptions for traditional statistical analyses. In particular, bootstrap is an effective method for assessing errors of estimates. More information can be found in Efron and Tibshirani (1986). 5 This study was conducted by generating a large population with similar distribution as the real sample (by approximating the sample with two truncated student t-distributions), from which 10,000 samples of 591 funds were drawn to represent the original 591 observations in our data. For each sample, the same bootstrapping procedures used in our analysis was applied. Across all 10,000 samples, we obtain 10,000 confidence intervals per significance-level and estimation method, whereby we can calculate the proportion of times the population parameter falls within the confidence intervals, and compare it with the expected proportion given by the significance level. 6 Less than 5 percent rank correlation between the binary baseline gender balance variable and fund size, and less than 2 percent Pearson and rank correlation between proportion of female in senior fund roles and fund size 7 Cambridge Associates does not include benchmarks for funds that are more recent than the 2015 vintage year. 8 Percentage of respondents in developed market and emerging market do not add up to 100 percent because some respondents do not indicate the country in which they are based. 9 Senior employees are managing partner or founder and partner 10 LP data include both emerging market and developed market. 136 Contact Information IFC 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA +1 (202) 458-2262 BMurti@ifc.org www.IFC.org/gender @WBG_Gender ifc.org