How Diversity in Private Equity Affects Buyout Performance
White paper based on findings in British Journal of Management
Building on the cooperation of EY with the HHL Center of Corporate Transactions and Private Equity (“CCTPE”), a joint white paper has been published based on the main findings of the academic article “The more the merrier? – Diversity and private equity performance” by Benjamin Hammer, Silke Pettkus, Denis Schweizer and Norbert Wünsche in the British Journal of Management (2021).
Influencer of diversity in private equity
Research suggests that the “bright side” of diversity is at least partially offset by a “dark side.” There are doubtless benefits of a diverse team; different backgrounds of the individual team members lead to a broader set of perspectives, contributing to more nuanced decision-making. Simultaneously, these exact same differences can lead to communication barriers and possible clashes between the individuals involved.
Diversity index specific to the PE industry
To discover which of these opposing aspects is dominant, the researchers introduced a novel, comprehensive diversity index specific to the PE industry. They measured diversity in PE-led partner teams by several socio-demographic (e. g. gender, nationality and age) and occupational factors (e. g. professional experience, educational background and university affiliation). The index was then related to buyout performance, measured by the mean growth of the portfolio firm’s enterprise value during the holding period (excess growth as deviation from listed peers in relevant industries in each country).
Influence depends on type of diversity
The analysis based on a sample of 241 international leveraged buyouts shows a clear advantage for lead partner teams with high socio-demographic diversity. A mix of nationalities, genders and age-groups brings in a number of different perspectives which, in turn, contributes positively to problem-solving.
The downside of diversity, such as inefficiencies in communication or coordination, seems to be less detrimental to teams with high socio-demographic diversity. By contrast, in teams with different academic and work backgrounds, the process deficiencies are outweighing the benefits of multiple perspectives. Partners with a high level of occupational diversity do not share the same “language of expertise”, resulting in a slow-down of execution speed, one key dimension of PE performance.
For more complex buyout deals, the rules are different. Here, both diversity dimensions have beneficial effects on the performance. In these more challenging circumstances, the different knowledge and perspectives through diverse backgrounds, cultures and levels of expertise of a team seem to outweigh the associated transaction costs and the importance of execution speed may diminish.
This article was written by Benjamin Hammer, Silke Pettkus, Denis Schweizer and Norbert Wünsche for the British Journal of Management (2021).