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More Women is Almost Always Good: Private Equity Edition

On April 10th, The New York Times ran an article about Robert F. Smith, the founder of Vista Equity Partners. Vista is a Private Equity firm with over $8 billion under management and returns “better than Warren Buffet’s.” Yet, to many who casually follow the industry, the most surprising thing about the piece was not that the little-known firm had earned a place alongside KKR and Blackstone; it was that Smith is Black. “The biggest challenge I’ve faced is a degree of loneliness,” Smith is quoted as saying, “Who is out there like me that I know?” The answer: plenty of people with Smith’s Ivy League background, but far fewer with his racial one. The article suggested that one of the strengths of the firm was that it capitalized on the relative diversity of its labor pool. Despite having Smith at the helm, though, that diversity was largely confined to the network of 1,600 people who staff Vista’s portfolio companies. At the top, among the firm’s Associates, Vice Presidents, and Principals, Vista follows the trend seen across the Private Equity industry: they’re nearly all men.

In 2013, women made up ten percent of all senior positions. This is low even by Wall Street’s standards, where women occupy nineteen percent of C-Suite positions. The main reason why Private Equity is so male-dominated is because it is a “deal-driven” business. In Private Equity, for better or worse, a firm’s expertise only goes as far as its network. For example, firms develop relationships with Investment Banks, largely male institutions that facilitate acquisitions for companies looking to be bought. In addition, many now have full stables of executives for the industries that they typically invest in. These people act as advisors during deal sourcing and in some cases join the management teams of the companies who join a Private Equity firm’s portfolio. They are all veterans of their respective industries, which makes most of them male.

That an all-male Private Equity firm would feel comfortable approaching, acquiring, and working with the all-male management of, say, a Midwest-based third-party logistics company is natural. But is it in the spirit of a fair and thriving business environment? While I hesitate to delve into the fairness question, I will argue that all-male firms hold themselves back from reaching their full potential. This contention is supported by evidence derived in both quantitative research and my own qualitative observations. A 2013 study conducted by DealBook at The New York Times found that hedge funds that year run by women outperformed those run by men. Another study, this time of retail investors, found that on average, men traded 45 percent more than women, but managed to earn 2.65 percent less. The conclusion: women are typically more conservative investors than men, which makes them more risk averse, which is undeniably a positive quality in a field like Private Equity where firms routinely perform acquisitions to the tune of hundreds of millions of dollars, each of which demands a return. There is something primal, and appealing to a certain masculine aesthetic, about a business that is constantly occupied with “outbidding,” “optimizing,” and “outselling” your competitors in the space. However, one can look to the 1980s in particular, an era littered with insane bidding wars, to understand that this psychological dimension often adversely affects decision-making.

Yet the competition in the Private Equity industry is not confined to rivalries among firms. Once a deal has been made, certain members of the acquiring firm become the company’s lead members, by working extensively with management and by serving on the board of the company. Most often, these are the same people who advocated for and executed the initial deal. Thus, their standing within the firm (and the financial compensation that is tied to it) become linked to the performance of that company. This appears to be reasonable, and in line with a proper incentive system for a successful firm, until you realize that the Private Equity firm itself operates under scarcity. Even with up to billions of dollars under management, a firm cannot fund every perceived good investment opportunity that comes to its attention. As a result, there is pressure among the investment team to present the deals that they might play an active role in through the best possible light. When the argument strays from honest assessment, as it can when egos are involved, the firm suffers. Certain women, given their risk averse approach to investing and their relative ability to stay above the fray of male competition, would be well-equipped to notice these deal pitfalls where a team comprised entirely of male investors might not.

According to Anthropology, reducing one’s decision-making capabilities to the color of their skin should be obsolete. Although exceptions still need to be made, we are approaching this conception of race more every day. At the same time, I believe we should continue to acknowledge the immutable biological difference between men and women, and work towards basing our social systems on an equilibrium between the two impulses.

Photo Credit: Wikimedia Commons

Robert Galliani

About Rob Galliani

Rob Galliani, a junior from Menlo Park, CA, took over as NBR's Editor-in-Chief last Spring. He's still trying to figure out how the Internet is possible.

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