While it is intuitive that private equity (PE) firms must both recruit and retain diverse talent to meet their diversity, equity and inclusion (DEI) goals, the specific outcomes necessary to meet those goals are not obvious. Here we present a standard deterministic time-series model to better understand what is required by firms to meet specified diversity goals over reasonable time horizons. The model is deliberately simple so that the mechanics driving the outputs are as clear as possible. That being said, we also discuss the important simplifying assumptions and the effects they could have in real-world scenarios.
The evolution of diversity is calculated on a year-by-year basis assuming employees leave the firm at a fixed rate (1 – retention rate) specific to their gender and race/ethnicity. Exiting employees are then replaced at the recruiting rates assumed as inputs. In most cases, the near-term dynamics (e.g., first 5 years) capture most of the change in gender and URM percentages. Over longer time horizons, the model asymptotically approaches an equilibrium level (that might be above or below the target level). The recruitment of women and URM interact in this model. For example, as the percent of women employees increases, the number of white males leaving the firm will decline in number (even though the retention rate is constant) simply because the total number of white males is declining. This effectively lowers the rate at which new URM can be hired to replace white males. In practice, the dynamics could be more complicated, and we discuss this possibility below.
Contact Greg Brown, Executive Director, Kenan Institute of Private Enterprise; Sarah Graham Kenan Distinguished Professor of Finance, UNC Kenan-Flagler Business School