The More the Merrier? Diversity and Private Equity Performance

Abstract

This paper explores how diversity among lead partner teams (LPTs) of private equity (PE) funds affects buyout performance. We argue that there is a trade-off between the 'bright side' of diversity (i.e. improved decision-making due to a broader set of perspectives) and the 'dark side' (i.e. deteriorated decision-making due to a potential for clashes and a lack of cooperation). Our theoretical framework suggests that the net effect on performance depends on whether LPTs are diverse in socio-demographic or occupational aspects. To test this hypothesis, we develop a comprehensive index that measures LPT diversity along six dimensions. Using a sample of 241 buyouts and 547 involved PE partners, we find that higher scores in the socio-demographic component (gender, age, nationality) are associated with higher deal returns and multiple expansions. The opposite is true for higher scores in the occupational component (professional experience, educational background, university affiliation). Further results suggest that the 'bright side' of diversity gets relatively more important in case of complex buyouts and uncertain deal environments.

Private Equity Buyouts and Exports: The Impact of Brexit on UK Firms

“…Finally, our study speaks to the literature that combines PE and board composition. Existing work notes the importance of PE directors' financial experience (Jelic et al, 2019), specialization (Acharya et al, 2013) or diversity (Hammer et al, 2022). Our evidence provides a key contribution by documenting the beneficial role of changes in the board and managers' international experience in the aftermath of Brexit on firms' exporting, both at the extensive and the intensive margin.…”

“…, 2013) or diversity (Hammer et al. , 2022). Our evidence provides a key contribution by documenting the beneficial role of changes in the board and managers' international experience in the aftermath of Brexit on firms' exporting, both at the extensive and the intensive margin.…”

Should Investors Care Where Private Equity Managers Went to School?

“…On the other hand, variety can also cause higher communication cost (e.g., Knight et al (1999)), and thus lead to lower efficiency of the team. Hammer et al (2022) argue in a similar direction by distinguishing between the "bright side" of diversity, i.e. improved decision making due to diverse perspectives, and the "dark side" in terms of potential clashes and lack of cooperation.…”