DEI in investing is defined as the practice of integrating diversity, equity, and inclusion considerations into how funds are managed, how capital is allocated, and how LPs select GPs. It spans both the composition of investment teams and the diversity characteristics of portfolio companies.
The LP Push
The institutional push for DEI in private markets has been driven primarily by large public pension funds. CalPERS, CalSTRS, NYCRS, the Illinois State Board of Investment, and several others have established formal emerging and diverse manager programs. These programs set aside dedicated allocations, sometimes hundreds of millions of dollars, specifically for funds led by women, people of color, and other underrepresented groups.
The rationale is both principled and practical. Pension funds serve diverse beneficiary bases and face pressure to ensure their capital allocation reflects that diversity. At the same time, research on cognitive diversity in decision-making suggests that homogeneous teams are more prone to groupthink, a particularly dangerous bias in investment committees.
What GPs Need to Know
If you are raising a fund and your team includes diverse principals or ownership, there are dedicated capital pools available. But the bar is not lower. Diverse manager programs still require institutional-quality fund formation, a credible track record, and a rigorous DDQ process. The difference is access: these programs actively source and evaluate managers who might not appear on traditional placement agent lists.
Key considerations for GPs:
Documentation. Have your diversity data ready. LPs will ask for team demographics, ownership percentages, and your firm’s own DEI policies. This information should be in your DDQ and available on request.
Emerging manager overlap. Many diverse manager programs are housed within broader emerging manager allocations. If your fund is both first-time and diverse-led, you may qualify for both pools. Understand the distinction: “emerging” typically means Fund I-III, while “diverse” refers to team composition.
Portfolio-level DEI. Some ESG-focused LPs also ask how you evaluate and promote diversity within portfolio companies. If you run a buyout or growth fund, be prepared to discuss board composition, C-suite diversity, and pay equity at the portfolio company level.
Industry Data
The private equity industry remains significantly less diverse than the broader financial sector. According to a McKinsey report, women represent approximately 20% of senior roles in private equity, and Black and Hispanic professionals remain significantly underrepresented at the partner level. The gap is more pronounced in senior, carry-bearing positions.
These numbers are moving. Fund-of-funds and institutional consultants now track GP diversity data systematically, and several have published commitments to increase allocations to diverse managers. For emerging managers with diverse teams, this represents a structural tailwind during fundraising.
Building a DEI Strategy
For GPs building their firm’s DEI approach, the most credible path is specificity. Generic diversity statements carry little weight. LPs want to see hiring pipelines, retention data, promotion criteria, and, where applicable, how diversity considerations factor into deal sourcing and portfolio management. Treat DEI as an operational practice, not a section of the pitch deck.
Frequently Asked Questions
Why do LPs care about DEI in fund management?
LPs increasingly view diverse teams as better decision-makers, citing research on cognitive diversity and reduced groupthink. Public pension funds face legislative and beneficiary pressure to allocate to diverse managers. Several large pensions, including CalPERS and NYCRS, have formal emerging and diverse manager programs with dedicated allocations.
What qualifies as a diverse-owned fund?
Definitions vary by LP, but the most common threshold is that women, racial or ethnic minorities, or other underrepresented groups own at least 33% of the GP entity or make up at least 33% of the senior investment team. Some programs use a 50% ownership threshold. GPs should check each LP's specific definition before applying to diverse manager programs.
Does team diversity affect fund performance?
Several studies suggest a positive correlation. A Harvard Business School study found that diverse VC partnerships had higher overall fund returns, driven by better decision-making on individual investments. McKinsey's long-running 'Diversity Wins' research shows companies with more diverse executive teams are more likely to outperform on profitability. The evidence is directional rather than definitive, but it is consistent.
