When it comes to DEI, investors are right to choose carrot over stick

LPs would sooner work with managers on diversity, equity and inclusion issues than show them the door.

For a long time after diversity, equity and inclusion became a talking point in private markets, it was hard to find actual examples of LPs “voting with their feet”. That is to say: there were few instances where we could point to an LP walking away from a fund based on a DE&I deficiency.

That’s why developments at the Pennsylvania State Employees’ Retirement System are worth noting. After the investment committee had approved a $125 million commitment to funds managed by lower mid-market firm Sentinel Capital Partners in June, the commitment was halted by the pension’s board amid a debate relating to DE&I. The contentious issue was not the number of “diverse” professionals within the firm; instead the problem related to whether the firm genuinely had a mentorship programme for women and minorities, as it had claimed to the pension.

The incident shows that DE&I, as a standalone issue, has the power to derail a fund commitment.

Should we be surprised? Not according to data from LGT Capital Partners released this week. The private markets investor surveyed 230 investors in alternatives (private equity, real estate, private debt, infrastructure and hedge funds) and found that 7 percent of them had declined a manager on DE&I grounds. A further 56 percent said they have not, but would do so if required. The remaining 37 percent said they would be unlikely to do so.

A fund investor told New Private Markets this week that they know of investors who had indeed passed over fund opportunities based purely on DE&I grounds. Often these investors had not communicated this reason to the GP, so they may have remained oblivious to the issue.

But let’s face it: at 7 percent, it is a small minority of LPs that have walked away from a fund based on DE&I factors.

In the case of PennSERS and Sentinel, this week the pension’s board voted unanimously to approve the commitment. A spokesperson for the pension told affiliate publication Buyouts that, since the June meetings, Sentinel had met with PennSERS staff and board members and developed a plan to address its commitment to diversity. “The plan, along with Sentinel leadership’s assurances, provided a clear and positive path forward,” the spokesperson said.

It seems that, in the main, investors would prefer to work with a manager on the issue – assuming they show authentic and intentional steps in the right direction – rather than simply turn them away.

For a problem that could take generations to fix, this is the right approach.