This article initially appeared in Forbes.

Middle Market Private Equity Can Be A Powerful Driver Of Diversity

Andrew Weinberg Forbes Contributor

I write about family-owned businesses, private equity and telecom.

Diversity Equity Inclusion

Diversity Equality Inclusion write on a sticky note isolated on Office Desk. GETTY

If you think it’s strange to see the words “private equity” and “diversity” in the same sentence, you would not be alone. Private equity, historically, has not been viewed as a poster child for Diversity, Equity and Inclusion (DEI). In fact, recent McKinsey research showed that in 2020, women and ethnic minorities with relevant degrees were under-represented at US private equity firms by 10 percentage points compared to corporate America.

So why do I believe this industry can be a powerful catalyst for DEI? For me, it comes down to three factors: capability, scale and the multiplier effect.

Let’s start with capability. Most successful investment firms have understood that diverse (and often contrarian) thinking is essential to making wise investment decisions. In an age of abundant dry powder, hotly contested deals, and almost constant market and economic disruption, diversity of thought matters more than ever. Consider for a moment the framework below devised by the author Matthew Syed.

A box represents a problem to be solved (e.g., an investment decision, or the strategy to transform a portfolio company), and a circle represents the potential contribution by a team member, centered around the specific expertise of that team member and sized according to the depth of their expertise.

It is obvious, then, why diverse teams produce better outcomes in solving problems than homogeneous teams. DEI is both a moral imperative and a tool for operational improvements. Private equity firms are responding by improving their talent intake, increasing lateral hiring of operators from outside their own firm or ecosystem, and, most importantly, forging partnerships with experts in DEI.

Partnering to Build Diverse Teams

Just as athletes need good coaches to reach their peak, private equity firms need outside input for the transformational change associated with DEI. In 2019, my firm established a strategic partnership with Billie Jean King Enterprises (BJKE) to do just that. For us, BJKE is a true partner, not a “consultant” — their expert team has unfettered access to all of our team members and we engage in frequent, unfiltered, and sometimes uncomfortable conversations.

This allows us to constantly challenge ourselves as individuals and as a firm to adjust our culture to be more diverse, equitable and inclusive. While the numbers across the industry can still be improved, the momentum is there.

Talking about scale, the US middle market (companies with annual revenues between $10 million and $1 billion) accounts for 180,000 companies, generating $9.3 trillion in revenue and employing over 50 million workers. This amounts to over one quarter of US business activity, with an increasing upward trajectory. The middle market is truly the engine of the US economy – and thus must not be left out of any discussion of DEI.

But while middle market firms can be highly innovative in product design and business models, many have operated with a sense of tradition that often stems from their founding days.

They are steeped in their local communities, which themselves might be homogeneous. Often by necessity, a strict focus on the day-to-day of the business can take priority over other concerns including DEI. Our firm often partners with companies run by families, founders and entrepreneurs. I am in awe of their traditions, and the businesses they have built. But I can also see opportunities to grow while still respecting tradition. DEI is one of those opportunities.

Multiplying the Power of Change

Now to the third point, the multiplier effect. Internal change at private equity firms is important, but the impact firms can have at portfolio companies is truly transformative. As an example, Brightstar Capital Partners is a growing firm with 40+ employees. Our portfolio companies, on the other hand, have a combined workforce of approximately 13,000. Doing the math for the industry as a whole, the platform for change is tremendous.

Without question, DEI is more complicated than raising leveraged finance or even improving a company’s supply chain. It is a cultural transformation, in need of catalysts and partners. As private equity firms start embracing DEI in their own organizations and see the tangible benefits, they will encourage portfolio companies to press forward with their own journeys. We offer BJKE’s services and insights to our portfolio companies, having seen the impact they continue to make at Brightstar.

Given the delicate nature of a cultural transformation, particularly after an acquisition, this catalytic process will take time. But over several years, portfolio companies’ board and leadership teams will become more diverse, as will their culture.

Private equity firms will be assisted in this process by the ecosystem they have leveraged and created for their own DEI improvement, further increasing the multiplier effect. Seeing the momentum across the industry, at my own firm and our ecosystem, I am convinced that private equity will transform itself into a catalyst for DEI across the US economy, both doing the right thing and improving returns for our partner companies and investors.

Follow Andrew Weinberg on Twitter or LinkedIn. Check out the Brightstar Capital Partners website.