The Impact of Leadership Diversity on Private Equity Fund Performance

Abstract

The aim of this study is to explore the relationship between the benefits of having a diverse top management team (TMT) with complementary perspectives, and the potential drawbacks of increased conflicts between team members. Using data of 1,071 fund partners involved in 1,295 buyout deals by 117 funds we find that TMTs with greater diversity in socio-demographic characteristics tend to achieve higher money multiples or internal rate of return (IRR). However, we also observe that greater occupational diversity has a negative net effect on performance. These results suggest that diversity arising from demographic characteristics is generally beneficial, while voluntarily acquired attributes may require additional coordination efforts. Additionally, our study finds that the distribution of team members and the associated diversity levels on individual deals within a fund can impact fund performance. We find an even distribution to be positively related to fund performance for occupational diversity and negatively for socio-demographic diversity. However, for funds with high levels of socio-demographic diversity, even distribution across deals is also positively associated with fund performance. Lastly our findings indicate that CEO involvement positively moderates fund performance, while industry specialization has a negative moderating effect. Overall, our findings could be useful for limited partners and fund-of-funds in investment processes and provide guidance for general partners when making staffing decisions.