The financial impact of diversity, equity and inclusion strategies is about to get a fresh test case. Former Xerox CEO Ursula Burns’ plans to set up a new private equity fund, called Integrum, to target business services and technology industries with a DEI focus. Burns is no stranger to firsts–she was the first Fortune 500 Black female CEO. With the new fund, Burns will array her expertise alongside that of co-founders Declan Kelly, the co-founder and CEO of Teneo, a CEO advisory firm; BC Partners alum Richard Kunzer; and former KKR partner Tagar Olson.
There is considerable evidence that an open-tent approach translates into higher returns.
Financial sponsors are increasingly quantifying the impact of inclusive investment. News of the novel fund comes only months after Carlyle Group announced a $4.1 billion credit facility that lowers the price of debt for portfolio companies that hit board-level diversity targets. The premise? Boards with more varied perspectives notched 12 percent higher earnings growth, the fund’s three-year analysis of its portfolio companies says. Seen this way, the discounted borrowing costs might reflect a lower risk premium.
Should the same diversity-linked returns materialize in Integrum’s results, the fund will be making its case at the right time.
The message hasn’t quite permeated Wall Street’s buy side community yet. Leading asset managers BlackRock and Vanguard voted to support the full slate of director nominations at companies without Black director representation in 163 and 166 of the 178 S&P 500 proxy elections surveyed in 2020, respectively. Activists including Demos Trustee Emeritus Heather McGhee, Color of Change CEO Rashad Robinson and NAACP President Derrick Johnson penned an open letter to asset managers in the Financial Times two days ago calling for action on fund managers’ commitment to rectify racial injustice. Their demands include a call to oppose all-white boards.
While operating in a distinct arena, efforts to hold corporate managers accountable for metrics that aren’t purely financial is applicable to private equity too. LPs can wield the same pressure that shareholders exert on management. Indeed, the Institutional Limited Partners Association has created its own Diversity in Action initiative to engage LPs and GPs in DEI. Over 100 of its 133 members have assigned senior level employees or committees to deliver accountable oversight of progress, though as of an April status update even defining an inclusive message has proved slow, with 56% of member LPs penning a DEI statement.
PwC practice leaders already envision a world where carried interest is tied to progress on other ESG targets like decarbonization. Why not diverse board membership as well? When fund returns show material advantage from this approach, ESG may go from niche to necessary.
Editor’s Note: Mergers & Acquisitions will focus on Diversity, Equity and Inclusion in the September issue of the magazine, including our inaugural list of firms and individuals embracing DEI. Join us for M&A’s Leaders in DEI Speak on Sept. 22 for our virtual live event.