Alternative Insight – January 2018

Mind the (gender pay) gap

Pressure is growing in the alternative assets industry to shrink the pay gap between male and female staff.

By April 2018 every UK employer with 250 or more employees will be required by law to publish its “gender pay gap” – the difference between the average earnings of male and female employees. Many companies have already published their data. Financial services has been found to have the widest pay gap of any sector. According to Staffmetrix, a data analytics consultancy, women in financial services earn 31% less than their male colleagues on average. Within financial services, the private equity industry scores particularly poorly.

Why is the gender pay gap so large?

  • Women are under-represented at all levels, but especially at the top, where compensation levels are very high. According to Invest Europe, a trade body, women in 2015 occupied a mere 5% of senior roles in European private equity – a lower percentage than virtually any other industry.
  • Down the hierarchy, women are thought to make up around 20% of the associate/VP-level cohort in private equity and roughly one-third of analyst-level roles. While these numbers fall way short of parity with men, they suggest that the industry does not offer the right mix of incentives and career advancement opportunities to retain the women that it does manage to hire in the first place.
  • In a Financial News survey conducted in 2016, a majority of female respondents working in private equity said they felt that their career had been held back as a result of having children – the ‘motherhood wage penalty’. This problem is not unique to private equity – research by the Institute for Fiscal Studies has found that the gender pay gap is linked to age and steadily increases for 12 years after the birth of a first child.
  • Women who wish to return to the labour force after having children generally face the challenge of balancing childcare with their careers. As a result, according to the Timewise Foundation, only 13% of returnees will go back to a full-time job, at least initially. Some 70% of returnees want a job with flexible or part-time hours, which typically fits better with their childcare arrangements.
  • Part-time employees often have a reduced shot at promotion compared to their full-time counterparts, because more senior roles are seldom designed to be filled part-time. The Chartered Institute of Personal Development has observed generally that there “is a belief that it is not possible to exercise more responsibility without putting in more hours”. This creates a ‘part-time wage penalty’ that disproportionately affects women.

Why are there fewer women than men in private equity?

  • Most of the people working in private equity today began their careers in investment banking or mainstream asset management. These sectors have traditionally been male-dominated, so there are simply fewer women than men in the candidate pool that private equity firms traditionally recruit from.
  • Pre-existing male dominance can become self-perpetuating. The tendency to hire (or promote) people just like you is one that cuts across geography and industry. Scientific research shows that we “connect” better with people when we have more things in common with them – background, experience, attitude, physical appearance, etc. On the other side of the interview table, this may discourage more women from applying to or believing that they can succeed in a stereotypically ‘macho’ sector.
  • Various studies have found that, rightly or wrongly, psychological traits such as being caring and having empathy are more commonly associated with women. These traits are seldom prized in deal-making, which is the lifeblood of the private equity business, particularly on the GP side. Studies comparing male and female behaviour have found men are more likely than women to assert themselves, take bigger risks, and generally compete more – all attributes which can (or at least are perceived to) help succeed in business, rightly or wrongly.
  • Within private equity, there is something of a distinction emerging between GPs and LPs. Indeed, 25% of respondents in a survey of LPs conducted by Coller Capital in 2017 said they believed that the working culture at GPs is the reason that there are more women (and more senior women) at LPs than at GPs.

Does the gender pay gap matter?

For the moment, the law is only concerned with the duty to report – not the duty to act. But there are sound commercial reasons that should persuade firms to make an effort to narrow the gender pay gap:

  • The negative publicity generated by disclosure of significant gender pay gaps can adversely affect a firm’s external relationships (with clients, for instance) and its internal ones (e.g. between employees), as organisations like the BBC have recently discovered.
  • Neurological and psychological studies have identified certain behavioural traits more common in women than men that could be hugely advantageous in asset management – for instance, a tendency to be more analytical and better at big picture and situational thinking.
  • A number of studies have found superior investment performance correlates with gender diversity. For instance, a Credit Suisse survey in 2016 found that organisations with more women in senior management positions are 50% more profitable on average. Karmijn Kapitaal, a Dutch private equity firm focused on investing in gender-diverse management teams, says that they deliver a return on equity 10-35% higher than the industry average.

How do we do better?

  • Involve women at every level of the recruitment and promotion process.  Training should be offered to interviewers to eliminate any unconscious bias.
  • Be more positive and supportive of flexible working and shared parental leave. Roles should be reviewed and re-designed to make them flexible by defaultsomething that is made increasingly feasible by new technology, which allows seamless offsite working.
  • Give serious thought to framing new family-friendly workplace policies. For example, KKR offers insurance coverage for women who want to freeze their eggs; Apax has extended paternity leave and also pays for emergency childcare if a nanny is off sick; Blackstone and EQT have both extended their maternity leave periods.
  • For LPs, consider including diversity and the gender pay gap in GP selection criteria, or at least as a disclosure requirement. A number of big institutional investors, like public pension plans, already do this. The more widespread the practice becomes, the more pressure GPs will come under to address the issue at their end.

You can access more details on the gender pay gap reporting calculations via the government website here:  https://www.gov.uk/guidance/gender-pay-gap-reporting-make-your-calculations

Alternative Insight is produced by MJ Hudson’s private funds lawyers. We provide expert legal advice to fund managers, other financial sponsors, investors and advisers on the formation, structuring, investment into and regulation of private funds, managed accounts and similar vehicles. Our practice covers the full spectrum of alternative assets, including private equity, venture capital, hedge funds, private debt, real estate and infrastructure. Clients praise our entrepreneurial approach, commercial outlook and dedication to helping them achieve their objectives, regardless of the obstacles.