Wednesday, June 20, 2018

Private Equity's Diversity Problem?

Sabrina Willmer of Bloomberg reports, TPG Scolded for ‘Stunning’ Lack of Diversity by Pension Official:
Jim Coulter, the billionaire co-founder of the giant private equity firm TPG, was in a Portland suburb with one of his largest clients when he got some tough questions.

The hot-button issue: a lack of diversity at the buyout firm.

The unexpected scene unfolded on June 6 at the Oregon Investment Council meeting -- and was recorded and posted on its website. The exchange offers a rare glimpse at how big investment firms are facing pressure from some institutional investors to change their white-male dominated culture.

About 30 minutes into the almost three-hour meeting, John Russell, the vice chairman of the council, asked the group to look at what amounted to Exhibit A: photos of the firm’s leaders in its flagship buyout unit, TPG Capital.

“When I first looked at that, it was stunning to me,” Russell said. A March TPG marketing document shows only 2 women among the 37 executives of TPG Capital. One of them is a partner.

“It isn’t that people of different ages, genders and ethnicity are better managers," Russell said to Coulter. "It is just that they have a view of the world that is broader. And companies can get into trouble without that diversity.”

Coulter responded that his firm needs to do better, particularly with women. “Our racial diversity is high relative to the industry,” he said at the meeting, referring to firm-wide numbers. “Our gender diversity with about 12 to 15 percent partners women is on average, but not nearly high enough in my view and it is something that we in the industry are working on."

Pension Pressure

Oregon isn’t the only state taking action following an onslaught of sexual harassment claims against executives in media, entertainment and finance.

The Los Angeles County Employees Retirement Association last year began asking private equity firms about their gender mix, sexual harassment claims and preventative measures, according to a person familiar with the matter. The Institutional Limited Partners Association, a trade group, plans to give questions to investors by September to use during due diligence about the gender and ethnic makeup by seniority of firms, policies promoting diversity and if anyone left due to sexual harassment.

"As awful as what these women went through in having to share their experience, it did provide a wake up call to the industry,” said Emily Mendell, who heads ILPA’s diversity effort. “Limited partners need to be part of the solution to harassment and diversity. Clearly this is a long-term game. Things are not going to change overnight.”

The private equity industry is run almost entirely by white men. Four of them -- Coulter, co-CEO Jon Winkelried, Chief Investment Officer Jonathan Coslet and co-founder David Bonderman -- lead TPG, according to the document viewed by Bloomberg. Women run or co-run other businesses, including a publicly-traded REIT, fundraising, compliance and capital markets at the firm, which manages $82 billion and is based in San Francisco and Fort Worth.

TPG, which has a diversity and inclusion committee headed by Winkelried, enhanced its health and family benefits for women and LGBTQ employees, and made recruiting more robust, the firm said in a statement. In the last two years, TPG has promoted five women to partner firm-wide, or 28 percent of the total.

Bonderman’s Remark

“The need for greater diversity and inclusion must be addressed throughout the financial industry. TPG is no exception,” said spokesperson Erika White. “We are proud of the progress we have made so far, but there is much more work to be done.”

At the June meeting with Coulter, Oregon’s Russell warned of the risks to companies that lack diversity, calling out Bonderman. Last year, amid the sexual-harassment controversy at Uber Technologies Inc., Bonderman made a sexist remark about female directors and then promptly resigned his board seat at the company.

“Your co-chair Bonderman was credited with part of the behavior that basically crippled the brand," said Russell, an office building owner in Portland with an MBA from Harvard. “And I would attribute that in part to lack of diversity.”

Coulter told the Oregon official that he was correct to raise the Uber incident.

“David made an undefendable comment,” he said. “He immediately apologized and immediately resigned from the board. I am pleased with how he responded in the aftermath even though I am embarrassed by the comment.”

Vote on TPG

Even as some institutional investors turn their focus to diversity, there’s no indication they will use money as leverage and withhold their backing of private equity funds. That could be costly. Buyout firms have been producing robust returns, helping them raise a record amount of capital last year.

After Coulter left the Oregon meeting, which covered TPG’s investment approach and market outlook, the council voted 4-1 to invest $500 million of the state’s pension plan in the firm’s buyout fund and health care pool.

The vote extended Oregon’s relationship with TPG, which goes back more than 20 years. In a statement to Bloomberg, John D. Skjervem, the chief investment officer of Oregon’s Treasury, applauded “TPG’s commitment to diversity and inclusion improvements.”

The no vote was cast by Russell. He said in an interview that while diversity was a concern, his dissenting vote was driven more by TPG’s wide-ranging investments.

Even though OIC sets the investment strategy for $102 billion in assets, including retirement savings, managed by the state treasury, Russell doesn’t think it has much influence when acting alone.

“The truth is, as big as Oregon is, we are just an asterisk in the whole scheme,” he said. “Until pension funds get together en masse, we won’t have much of an effect.”
Russell is right, the OIC can't change the industry alone which is why the Institutional Limited Partner Association (ILPA) is getting involved and sending out a questionnaire to its members to use in their due diligence with GPs.

The ILPA is wasting its time. For one, many of its members suffer diversity and inclusion problems within their own senior ranks.

I once attended an ILPA meeting in Chicago with Derek Murphy, PSP's former head of Private Equity. It was one big schmooze fest, a total waste of time in my opinion but I got to meet Mark Wiseman there and met some other big investors. Let me tell you, it was mostly white men attending this meeting and I include myself as part of that group.

Another reason why the ILPA is wasting its time? Because private equity is run by old white men, most of which have a very high opinion of themselves and privately scoff at diversity and inclusion.

This article singles out TPG but trust me, it's not that much better at other big private equity funds. Go and drill down at their upper management and look at who's calling the shots, old white men.

"So what? What's wrong with that? David Bonderman, Jim Coulter, Henry Kravis, George Roberts, Stephen Schwartzman, Leon Black, David Rubenstein, William Conway are all successsful private equity titans who worked hard to become billionaires and they can do whatever they want."

Well, not exactly. They became billionaires through the billions public pensions invested in their funds so they do have to answer to their investors just like public companies have to answer to them when it comes to diversity in upper management and at the board level.

Why are pensions putting the pressure on private equity and public companies to focus on diversity and inclusion? It's not just a social mission, they're acting as fiduciaries who are first and foremost looking for better returns over the long run and it turns out diversity and inclusion are important factors for any organization to improve its long-term performance.

I personally hate the word "diversity". It's limp and impotent, offers no power. I much prefer inclusion and empowering women and minorities to make real consequential decisions.

By the way, some private equity funds are doing a lot better than others when it comes to diversity and inclusion so it isn't fair to bundle them all up but truth be told, the real power in the industry still resides with old white men.

And it's not just private equity. The hedge fund industry isn't any better, at least not at the very top. It too is run by old white men but there are cracks starting to test that male-dominated power structure.

Leslie Picker, Dawn Giel and Jen Zweben of CNBC recently reported, The woman suing Point72 and Steve Cohen speaks out about alleged gender and pay discrimination:
Lauren Bonner says quitting wasn't an option.

Bonner is head of talent analytics at hedge fund Point72, a job that gives her access to data like compensation and college grade point averages for individuals hired by the firm. But as she tells it, that data unveiled a gross injustice — one that, inspired by the broader #MeToo movement, encouraged her to take action.

In February, Bonner filed a gender-bias lawsuit against Connecticut-based Point72, though she continues to go to work at the firm's Manhattan office every day.

"I certainly tried to make change internally," Bonner told CNBC in her first television interview. "I just couldn't let it go. I couldn't walk away from the problem. It's too important. It was too blatant, and it's been going on for way too long. I just couldn't help but fight it."

In her lawsuit, filed in New York federal court, Bonner accuses Point72, as well as its founder, the well-known hedge-fund manager Steven Cohen, and its now-former president Douglas Haynes of sexism. Bonner said they violated equal-pay laws, engaged in gender discrimination and retaliated against her by denying a promotion after she reported her superior for harassment.

In a statement to CNBC, Point72 said, "Contrary to Ms. Bonner's assertions, this lawsuit is replete with allegations that are false or based on unsubstantiated hearsay and that she never brought to the attention of Firm management."

Bonner continues to go to work at Point72, a situation she described as, "awkward but also not that bad." She said previously she would come to work "demoralized," but now she feels "a little bit more positive" about what she's doing.

Does Wall Street have an institutional bias?

Bonner's claim intertwines stories of harassment, data on pay disparity and a lack of diversity among the senior ranks at the firm, as well as the obstacles she faced in climbing the ladder.

She said that all of these issues are some form of discrimination against women.

"What I saw over time, looking through the data, was that there was an institutional bias that was so entrenched that it just made it pretty impossible for women to advance economically or professionally," she said.

In her claim, Bonner said that of the 125 portfolio managers that Point72 employs, all but one are men. She said there is only one woman among 32 managing directors. Bonner also points to last year's new hires, of whom, she said, only 21 percent were women; none was brought in as portfolio manager or managing director, she said. One new director was a woman, while 14 were men, she said.

"I see things like female candidates coming out of college have to have GPAs and SATs that are 20 percent to 25 percent higher than their male peers to get the exact same job," Bonner said in the interview.

"I absolutely believe it's due to an inherent bias against women," said Jeanne Christensen, a partner at Wigdor LLP, the law firm representing Bonner in her claim. "It just seems very suspect that you would have an extremely successful company with not one woman at the top."

In the claim, Bonner compared her own compensation with the pay of specific male colleagues. She had been seeking a promotion to the director level from associate director but was denied. She said she believes her inability to move up at Point72 (and narrow the pay gap) was because she reported one of the members of the promotion committee to human resources for alleged harassment. She said he retaliated against her by not granting her the title of director.

'Too aggressive' for a promotion

Bonner had only been at Point72 for about 18 months when she filed the lawsuit but said her short tenure was not a factor in the promotion committee's decision.

"It couldn't be experience because men with lesser and worse experience came in at a higher level than I did — off the bat," Bonner said. "It's also hard to imagine that it has anything to do with performance because I got the highest possible performance reviews."

Bonner said she was told she was "too aggressive to be promoted."

"You certainly don't build a cutting-edge technology platform by being a hothouse petunia, so I certainly had to be assertive to get things done," she said. "It's confusing to be labeled with that word, aggressive, when it's a culture of performance, and men are specifically told to be more aggressive and to break more china."

Bonner alleges that men with less experience and fewer responsibilities were coming into Point72 at the director level, which ranks above associate director. She said her compensation was as low as 35 cents on the dollar that these men made. Bonner says that she hasn't seen instances of women making more than men who were doing the same job at Point72.

"I don't think this is a question of nuance," she said.

A spokesperson for Point72 said the firm "was already addressing the underrepresentation of women and minorities — a reality across the finance industry — with a series of initiatives designed to recruit and support them before Ms. Bonner was hired. In fact, she was involved with some of those initiatives."

"But instead of working with us constructively to advance our goals of diversity and inclusion — and after only 18 months of employment at the Firm — Ms. Bonner demanded $13 million, and sued when that demand was rejected."

A representative for Bonner declined to comment on the $13 million figure.

An internal review of the firm's culture

Point72 is seeking to move the case from court to arbitration, where the merits of it would be argued out of the public eye. That decision is up to a judge, who has yet to rule on the firm's request.

Regardless of the forum, Bonner will find herself up against a defendant who is known for his dogged battles through the court system. Cohen's former hedge fund, SAC Capital, paid a record $1.8 billion fine to the government to settle charges of insider trading brought against the firm in 2013.

Cohen himself was charged in a civil case by the Securities and Exchange Commission with failure to supervise his employees and was banned from managing outside capital as part of a settlement. He did not admit or deny wrongdoing, and the ban was lifted earlier this year.

Also this year, Point72 hired the law firm WilmerHale to conduct an internal review into the firm's culture. Cohen announced several changes in April following the review, including expanded parental leave and the creation of "Chief Inclusion and Engagement Officer."

"We conducted an internal review for Point72 because Steve Cohen wanted to ensure that his firm was living up to its stated values," said WilmerHale's Jamie Gorelick, who led the review. "He fully embraced changes that we suggested in a way that is rare for a corporate leader. I think that the firm's culture is already stronger."

The firm has previously said that the review was not in response to Bonner's lawsuit. Haynes as well as Michael Butler, head of human resources, departed the firm between March and April. Haynes couldn't be reached for comment.

In an email to CNBC, Butler said he decided to retire after four years as Point72's head of human capital and will act as a consultant to the firm until the fall. "I am extremely proud of the transformational work we did with our Human Capital team during my tenure, finding new ways to source, select, develop, reward and retain our employees. We delivered on our Mission to create the greatest opportunities to the industry's brightest talent. "

Bonner said she doesn't know if the departures were a result of the suit, only to say "They left shortly after I filed."

"The real win I hope for is an intolerance of bad behavior at the firm," Bonner said. "And ultimately, of course, I hope for gender parity and equal pay."

When asked whether her job has changed at all since she filed the lawsuit, Bonner said, "My role is the same, but I'm a little less busy than I used to be."

Bonner, who has previously worked at the largest hedge fund in the world, Bridgewater Associates, conceded that sexism is an "industry-wide issue," but added that it's "particularly acute at Point72."

But so far no other women have publicly signed onto her lawsuit or filed a similar one against Point72. And few have come forward to call out any type of systematic bias on Wall Street.

"There's a reason more stories haven't come out, and it's not for lack of stories," Bonner said. "They haven't come out because of this culture of this small boys club that you really have to know other people to get jobs."

There are some other high profile gender bias cases on Wall Street. In March, a federal judge cleared the way for a class action lawsuit against Goldman Sachs. Four women who are former employees sued the bank in 2010 over allegations of systemic gender bias, including discrimination in pay and job promotion. Goldman has asked the court of appeals to review the decision.

As for what hedge funds and other financial institutions can and should be doing to make the environment better for women, Bonner said it's as simple as awareness by leadership.

"Choose to be intolerant of bad behavior," she said. "It may be uncomfortable to call someone out. But that's what actually changes a culture. And I would say for leaders at funds to actually embrace intolerance of poor behavior, would actually go a long way."
Now, I'm on record stating that it's time for investors to take a closer look at hedge funds and I wouldn't flinch investing in Steve Cohen's new fund (but I wouldn't pay 3 & 30 to him or anyone else).

But when I read Bonner's accusations, she raises several red flags. She might be after money or she might just be sick and tired of the "old boys club" and trying to do something about it.

I certainly don't buy the utter nonsense that she was "too aggressive for a promotion". The woman has cojones and she's proving it. Cohen would have definitely promoted her if she was a man. He knows it, she knows it and I know it.

Hell, the whole world knows it which is why my best advice to Steve Cohen is cut your losses, promote her and give her more responsibility at your firm. If it's a question of pride, swallow it, ten years from now, you won't care especially if it turns out to be the greatest decision of your life.

Having said this, I will defend Cohen and others on one point, these discrimination suits aren't always black and white. Sometimes you see women who bark loud being promoted and just like men who bark loud being promoted, they often don't deserve it.

There are a lot of men and some women in the finance industry who have a grossly inflated view of their qualifications and what they offer their employer.

To these men and women, all I have to say is come into my universe where all you have is a computer and try to make a buck to survive by eating what you kill.

The market doesn't care if I'm short, tall, fat, skinny, good looking, ugly, a woman, a man, trans, gay, disabled or a visible minority, the market is equally ruthless to everyone, which is the one truism every investment manager knows all too well.

Every single day, I sit in front of my computer or iPad and just look at stocks and charts and the one thing I love is it's me versus Miss Market and let me tell you, she's ruthless and always looking to take my money. Sometimes she wins and sometimes I win, and as long as I can beat her most of the time, I'm surviving, but man does she suck out all my energy!!

On that note, here are the stocks making big moves on my watch list today (click on image):


Once again, don't try trading or investing in any of these stocks, especially if you don't know what you're doing, you might get whacked hard when you least expect it:


Below, Jason Kelly of Bloomberg News reports on TPG's diversity problem. Like I said, it's not just TPG although it looks to be lagging its peers when it comes to diversity and inclusion.

And Lauren Bonner, plaintiff in a lawsuit against Steve Cohen’s hedge fund, discusses her decision to take Point72 to court with CNBC’s Leslie Picker.

Is Mrs. Bonner right to sue? I don't know, all I know is she is courageous to take on one of the fiercest sharks in the hedge fund industry. Maybe Steve Cohen has finally met his match, but whatever happens in this case, it's time everyone in the private equity and hedge fund community and their big investors take note, diversity and inclusion are a real problem.


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