Navigating European DEI Regulations in Private Equity: insights & strategies from top funds

Fair HQ Team

Jul 4, 2024

Our CEO & Founder, Kate Pljaskovova, and our wider team spend most of their days speaking to leading asset managers about Diversity, Equity and Inclusion (DEI). Here are some of the key insights from our recent roundtable on DEI regulation impacting Private Equity portfolio companies. Insights were shared by funds from £100MM AUM to £150Bn+ and they were enriched with data and anecdotes from other conversations.

Key takeaways

  1. DEI Regulation as a Driver: Regulations are crucial in convincing skeptics and providing a framework for DEI initiatives.
  2. Data Collection Challenges: Local legislation in Europe complicates DEI data collection, but third-party solutions offer a way forward.
  3. Value Creation: DEI is increasingly recognized as a value creation driver, particularly in tech and service industries.
  4. CEO and People Team Buy-In: Successful DEI strategy & material progress require strong buy-in from the CEO, and expertise, time and resources from dedicated people, which are both often missing within Portcos.
  5. Broader Focus on Inclusion: Funds are expanding DEI conversations to include inclusive culture, beyond just diversity metrics.

Summary of DEI related regulation in the EU & UK

(not exhaustive list of course)

Theme 1: Current State of DEI in Funds

  • Many funds are still in the early stages with DEI, especially compared to carbon initiatives.
  • Social KPIs and DEI are often seen as less scientific and harder to quantify compared to carbon metrics.
  • It’s uncommon for portfolio companies to have a standalone DEI strategy, unlike the more prevalent Net Zero carbon strategies.

Theme 2: Regulation as a Catalyst

  • DEI regulation can initiate important conversations and actions, especially with skeptical CEOs and investors.
  • While regulation can sometimes be seen as a compliance exercise, funds are striving to use it to build a business case for DEI through LP pressures and potential ROI/exit opportunities.
    • LP Pressure on DEI: Increasing, with 45% of LPs now requiring DEI as part of due diligence, up from 25% two years ago. Many add DEI to term sheets and require some level of reporting.
    • ROI & Exit Opportunities: There’s a rise in Article 8 and Article 9 funds, focusing on ESG and DEI. Companies without strong DEI documentation and progress risk exclusion from these opportunities.

Theme 3: Forward-Thinking and Value Creation

  • Funds are looking ahead and using current regulations to guide portfolio companies on future requirements as they scale.
  • DEI is viewed as material for value creation, especially in tech and service-led businesses. However, establishing strong DEI strategies across portfolio companies has been challenging.
  • The success of DEI initiatives often depends on the buy-in from the CEO and the expertise within the People team. Without these, progress is limited during the holding period.

Theme 4: Reporting and Data Collection

  • Most funds require some level of DEI reporting, typically focusing on board diversity, senior leadership, and sometimes gender pay gap.
  • DEI data collection in Europe is complicated by local legislations, with many funds struggling to gather data beyond gender (or to precise female/male split).
  • There is a growing awareness that broader DEI data can be collected in Europe using third-party services, but only few funds have implemented such solutions yet.

Theme 5: Broader DEI Conversations

  • The discussion around DEI is broader than just diversity reporting, often encompassing inclusive culture, although few funds have made significant progress in this area.
  • Some funds are reconsidering the language and focus of their DEI efforts due to political backlash in the US, but remain committed to DEI due to supportive regulation and value creation potential in Europe and the UK.

By addressing these themes, funds can better navigate DEI challenges, leverage regulatory frameworks, and drive meaningful change across their portfolios. If you have further insights or would like to discuss these topics in more detail, please feel free to reach out.

Feel free to share this summary with your colleagues and stakeholders to continue driving DEI progress in your funds.

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