Over the course of 2022, the global private markets industry experienced a slowdown in fundraising and deal making because of rising interest rates and other factors. Despite the rocky year, private equity and alternative investments (hereafter PE) and alternative investments remain significant in the global economy. The industry now manages $11.7 trillion in assets, up from $8.0 trillion the previous year. The financial power of PE reinforces the importance of understanding the composition of its talent, particularly the professionals who decide how this capital is deployed.
Building on McKinsey’s 2022 report, this year’s report examines the diversity of talent in PE firms, which we will refer to simply as PE firms. Specifically, we examine the gender breakdown in every region in our study and look at ethnicity and race in the United States and Canada (for more on the research and analysis, see sidebar “About the study”).
This year’s report centers on the following core research objectives:
- understand the current state of gender diversity globally, and ethnic and racial diversity in the US and Canada, for the PE industry—specifically, which types of firms are leading and lagging on diverse talent
- how institutional investors influence the representation of diverse talent at PE firms, and the extent to which diversity matters to them
- highlighting the specific challenges facing different minority groups and identifying actions that can increase the diversity of talent in PE firms
This report finds encouraging signs of progress in recent years. Diversity on investment committees (ICs) has ticked up, and the reporting of diversity metrics to institutional investors continues to grow.
Still, gaps remain, particularly regarding gender diversity in senior investing roles and uneven rates of progress for different ethnic and racial groups across roles and regions, and types of firms. Given the current pace of progress, it will be several decades before the PE industry achieves gender parity at the principal and managing-director levels.
A global view on gender diversity in private equity and alternative investing
There is a popular assumption that PE is dominated by men, but the evidence reveals a more nuanced reality. As we noted last year, PE firms have almost achieved gender parity globally at the entry level. At the end of 2022, 48 percent of all entry-level roles in PE were held by women.
However, women in PE are still underrepresented in leadership positions, with only 20 percent representation in managing-director roles (for more on job levels, see sidebar “Job levels in private equity”). As Kelley King, senior vice president and chief DEI officer at HarbourVest, explained, “Identifying and attracting early-career diverse talent is not as challenging as finding later-career talent. As you ascend higher in the organization, the more patient and intentional firms need to be to reap the benefits of their DEI efforts.”
Women are well represented in most noninvesting roles, but gender parity remains distant in investing and operating roles
Disaggregating the data into investing, operating, and other noninvesting roles (the latter of which we will refer to as noninvesting roles) reveals that women hold only 33 percent of entry-level investing roles, compared with 44 percent of operating roles and 59 percent of noninvesting roles at that level. Women are also underrepresented at the managing-director level (L2), with only 15 percent of managing-director-level investing roles (Exhibit 1).
Women in PE have made modest gains in investing roles over the course of 2022. The share of C-suite roles held by women globally increased by 3.5 percentage points over the past year to 17 percent at the end of 2022. Similarly, women’s representation in post-MBA investing associate (L5) roles improved by three percentage points. However, gender diversity at the managing-director level remained constant.
Women in PE are better represented in operating roles than in investing roles, but women hold only 30 percent of all operating roles. Notably, women in operations have achieved gender parity at the associate level (L5), with 52 percent of roles. However, gender diversity undergoes a steep decline at higher levels, with women holding just 21 percent of managing-director-level (L2) operating jobs.
Progress is generally cause for optimism, but if the pace of progress doesn’t accelerate, the path to gender parity in the industry will be long. At the current rate of progress, reaching gender parity in investing roles at the managing-director level (L2) would take more than six decades. Achieving gender parity at the principal level (L3) would take more than three decades (Exhibit 2).
While these numbers are sobering, the outlook is significantly brighter at the entry level. Based on current figures, the industry could reach gender parity at the analyst level (L6) and associate level (L5) within the next decade.
Promotion rates: Women in investing face a longer road
In demanding PE careers, women find themselves navigating a longer route to reach the same milestones as their male colleagues. At almost every level, women in investing roles are promoted at significantly lower rates than men. Globally, men in investing roles are about 50 percent more likely, on average, to be promoted than their female colleagues, a trend that persists across all levels in investing roles (Exhibit 3).
The largest gap affects promotions into the principal level (L3), with men 2.75 times more likely than women to be promoted. One contributor to this disparity may be limited sponsorship and mentorship for women at the vice president (VP) level. As the head of talent for a North American PE fund put it, “At that [middle] level is where we find a number of ethnic minorities and women who have really felt like the levels they are at have a sticky floor. They found that it’s really hard to get that next promotion. They feel left out. They haven’t received the kind of mentorship and the kind of apprenticeship that they’re really going to need or the sponsorship to get promoted.”
The road to meaningful progress will likely be long. However, there’s a bright spot: the promotion gap at the managing-director level (L2) shrank in 2022.
Significant differences in representation between leading and lagging firms
Some firms have made noteworthy strides on the diversity of their talent pool, so much so that the industry’s global average of women in 15 percent of investing managing-director roles looks paltry by comparison. Leading firms had women in 44 percent of managing-director (L2) roles as the end of 2022. These firms also had significantly higher proportions of women at every level and overall had women in 38 percent of their investing roles, compared with the global average of 23 percent.
Interestingly, firms that were leaders in gender diversity (as indicated by relatively high proportions of women in managing-director roles) didn’t retain women at significantly higher rates than the industry average. However, firms that lagged on gender diversity showed significantly higher attrition in 2022 among women in investing. These firms in our sample did not have women in managing-director (L2) investing roles and had only 16 percent women in investing roles overall compared to the 23 percent global benchmark. Furthermore, these firms’ attrition rates for women in investing were 1.8 times higher, at 23 percent, than the global average over the course of 2022 (Exhibit 4).
For investing roles, our findings suggest a correlation between the representation of women at the top and higher overall gender representation, as well as between lack of women at the top and their ability to retain women at all levels of investing roles.
Our findings on gender diversity over time also highlight the feasibility of substantial progress when decision makers deploy effective strategies. Indeed, the results of our study show that not all PE firms are equal when it comes to cultures that support diverse talent.
Different regions have different timelines to gender parity
The timelines to achieving gender parity vary by region. For instance, despite advances, Europe still faces significant challenges related to women’s representation at senior levels. At its current pace, Europe would require more than six decades to reach gender parity at senior levels.
By contrast, based on the rate of recent progress, the Americas are the furthest from achieving gender parity at middle and junior levels for investing roles. The situation is notably different in the Asia–Pacific region, which has done the most to close the gender gap at middle and senior levels recently (Exhibit 5).
A concerning trend has emerged over the past two years: gender representation has seen a minor decrease in the Asia–Pacific region at the associate level (L5). Although this decline starts from a relatively high base, it indicates the need for ongoing efforts to maintain a diverse talent pipeline that can help the industry achieve gender parity.
Ethnic and racial diversity in private equity
Consistent with our past findings, ethnic and racial minorities in PE face similar underrepresentation as women. At nearly every level, investing roles have lower ethnic and racial diversity than noninvesting and operating-partner roles.
Our research data from the United States and Canada shows that ethnic and racial minorities represent only 20 percent of managing-director-level investing professionals (Exhibit 6). For context, people who identify as ethnic and racial minorities account for 30 percent of the Canadian population and 41 percent of the US population. However, we found positive progress in ethnic and racial diversity in ICs in 2022. Ethnic and racial minorities represented 18 percent of investment committee members, nearly matching the ethnic and racial diversity of managing directors (L2) that year.
The improvement in the diversity of talent in investment committees over the course of 2022 may be the result of new requirements for PE firms to disclose C-suite- and investment-committee-level diversity data to prospective investors. The chief HR officer of a midsize PE firm headquartered in North America referred to this as “a standard part of the due diligence questionnaire these days.”
Investment professionals who identify as White held 71 percent of all investing roles and 80 percent of managing-director roles. As of 2022, White men made up the majority of White PE professionals at 80 percent, with 86 percent at the managing-director level. By contrast, women who identify as ethnic and racial minorities were the least represented group among investment professionals across all levels. White men were also promoted at higher rates than their peers, with White professionals leading promotion rates into every level except principal (L3). The difference in promotion is most drastic at the managing-director level (L2), in which White professionals were more than 2.3 times more likely to be promoted than any other race or ethnicity. And once they make it to the top, White professionals has the lowest rates of attrition, trailing only Hispanic and Latino investing professionals in attrition rates at the principal level (L3) and managing-director level (L2).
Firms with more ethnic and racial diversity at the top tend to have more-diverse talent pools
Not all PE firms have struggled to attract and develop talent from ethnic and racial minorities. Leading firms have reached or are nearing representative levels, with 38 percent of investing talent identifying as ethnic or racial minorities, compared with 30 percent of the Canadian population and 41 percent of the US population.
Lagging firms, on the other hand, have almost no ethnic and racial diversity at senior levels. These challenges at the top are reflected throughout the organization, with only 22 percent of investing professionals at lagging firms identifying as ethnic and racial minorities.
Firms that lead the industry in ethnic and racial diversity have demonstrated that significant progress is possible, but there is still work to be done to make PE offices in the United States and Canada more representative. Black and Hispanic professionals remain underrepresented, even at firms that lead on ethnic and racial diversity. Fourteen percent of the US population is Black, and 19 percent is Hispanic, but even at leading firms, only 8 percent of managing directors are Black, and 9 percent are Hispanic.
Institutional investors are asking more about DEI metrics
When making funding decisions, institutional investors increasingly take PE firms’ DEI practices into account.
Institutional investors are broadening their view of DEI beyond the investment team and institutional investors now increasingly ask about DEI metrics within portfolio companies and their boards (Exhibit 7). This growing interest from institutional investors has encouraged PE firms to systematically track and report on these metrics, fueling momentum toward diversity and inclusion in the industry. As a partner at a North American PE fund put it, “Data requests from LPs [limited partners] on diversity and inclusion have gone from zero in the 2000s to everyone asking about it today.”
Notably, some institutional investors track PE firms’ year-over-year improvements in diversity and inclusion as part of their DEI assessments. Forward-looking institutional investors have started to move beyond simply tracking DEI metrics and are beginning to set minimum thresholds on some metrics. For instance, one institutional investor in our sample requires PE firms to meet minimum racial- and gender-diversity thresholds before the institutional investor considers making an investment.
Structural barriers for PE firms owned by ethnic and racial minorities and women
Institutional investors are continuing to gather data on diversity inclusion. But are their allocations consistent with their stated priorities?
Institutional investors that participated in last year’s study said they would be willing to give more capital to more-diverse deal teams. However, institutional investors face challenges in making that promise a reality. As of 2021, PE firms owned by ethnic and racial minorities and women managed only 6 percent of total AUM in PE. If diversity is high on institutional investors’ priority list, why don’t minority-owned funds receive more capital?
The hurdle for minority- and women-owned funds is not their track record or the investing team’s experience. The challenges are structural and make it harder for institutional investors to allocate to these firms. For instance, compared with their competitors, minority- and women-owned firms are smaller and newer on average. In the current macroeconomic environment, institutional investors are relying more on existing long-term relationships with general partners to weather the cycle, leaving even fewer slots for these firms to compete over. To connect with these firms, institutional investors would have to go through brokers or adjust their minimum allocation rules to directly invest in smaller raises.
As institutional investors continue to shape the future of private equity, their influence will be vital in ensuring that DEI remains top of mind. Through thoughtful capital allocation and continued focus on DEI metrics, institutional investors have the power to drive meaningful change in the sector, making PE more inclusive, more diverse, and ultimately more successful.
From aspiration to action: Tangible steps toward a more diverse future
Our study highlights that to achieve a more diverse, equitable, and inclusive industry, firms require additional internal actions and practices as well as external pressures. Strategies to retain and promote diverse talent within PE firms would need to coexist with a collaborative commitment from institutional investors to demand DEI metrics and support women- and minority-owned funds. Our discussion focuses on specific actions and regional considerations that can accelerate the path to greater diversity of talent within investing roles in private markets globally.
Must-haves: A focus on retaining diverse talent and practices that accelerate the path to equity
PE firms have made initial progress in diversifying their entry-level talent pipelines. To establish a more inclusive culture and move toward gender parity, those efforts would need to extend to the senior ranks. It’s important for practices that promote diversity and inclusion to be embedded in every level of the organization. DEI should not be seen as just a recruitment initiative.
Key practices to implement include the following:
- analyzing attrition and promotion rates by gender, ethnicity, and race where possible, along with other measures of diversity, to shed light on firms’ effectiveness in retaining and promoting diverse talent
- developing intentional sponsorship and mentorship programs that can guide diverse talent, especially in midlevel roles
- establishing employee resource groups (ERGs) for diverse talent to offer safe spaces for interaction, discussion, and mutual support
- implementing more flexible HR policies, such as remote work, to cast a wider net for talent and improve inclusion for professionals from diverse backgrounds
- hosting unconscious-bias and conscious-inclusion training to minimize the impact of unconscious prejudices on decision-making processes
- creating intentional on-ramps and off-ramps for employees as they transition to and from parental leave or extended time off to help normalize these journeys
These initiatives go beyond recruitment and are crucial in building an inclusive environment that not only welcomes diverse team members but also enables them to flourish and ascend the ranks. By committing to these practices, PE firms can nurture diversity throughout their organizations, from the entry level to top leadership.
The road toward equity in PE is long, but a continued focus on actions that could accelerate progress can put the industry’s aspirations within reach. Institutional investors can continue to reinforce the industry’s commitment to DEI, and by acting on these commitments, PE firms can hone the edge that comes with diversity.
