Investors turn the diversity spotlight on debt

Given their more limited ability to influence DE&I at the asset level, private debt managers initially faced less scrutiny on the issue from LPs. That is now beginning to change.

While the private equity industry has been under pressure for some time to improve diversity and inclusion within its ranks and across its portfolios, debt managers have slipped under the radar. Now, LPs are asking more questions of credit managers and pushing them to move the needle on diversity.

The trend was signalled in January 2021 when Ares Management hired Indhira Arrington as its first global chief diversity, equity and inclusion officer, who has a direct reporting line to president and CEO Michael Arougheti.

Adam Heltzer, managing director and global head of ESG at Ares, says: “In the last year or two – and earlier in Europe than in the US – the views of LPs have changed dramatically. This is now absolutely on their radar and we are finding both the volume and sophistication of questions increasing. The number of RFPs we have coming in with a DE&I connection has quadrupled in the last two years, and those LPs are not just asking if we have a policy, they are interested in our implementation and direction of travel.

“For a long time, the focus has been on private equity because of the inherent influence and control. In direct lending, there was lower priority, even among the LP community. In the past year, we have really tried to flip that and ask ourselves what influence we can have as one of the leaders in the lending market.”

While credit managers cannot exert influence over diversity among their borrowers in the same way private equity sponsors can challenge portfolio companies, the drive to at least diversify the industry is gathering pace.

Antje Hensel-Roth, chief people and external affairs officer at Intermediate Capital Group, says: “As it relates to the GP, investors absolutely want to see ICG taking active steps to build diverse teams because that tends to lead to better decision-making. D&I is less on their radar as it pertains to the underlying assets of debt funds.

“At the corporate level, clearly this is very much top of the agenda. We should absolutely talk about the merits of diversity and inclusion, because there is so much evidence now that diversity of thought leads to more robust outcomes, more innovation, more creativity, more constructive challenge within a team and better decision-making. Our investors expect to see a higher degree of diversity and expect us to pay attention to it in a way they haven’t perhaps expected in the past.”

ICG has created an inclusion hub and identified inclusion champions, as well as creating a series of networks to support and elevate the voices of different groups within the firm.

“We believe very strongly that the key thing is to anchor D&I very firmly in our culture at all levels – it absolutely shouldn’t just be an HR initiative,” says Hensel-Roth. “For us, it’s a business leadership question, so we have anchored it in the KPIs for our top executives, whether that’s board members, partners or other leaders in the business. People are being held to account in greater depth according to how well they are doing on this point. It’s really important that senior management leads by example.

“Investors are very much pushing this topic, realising that diversity delivers better performance”

Cécile Mayer-Lévi
Tikehau Capital

“The development piece is critical, looking at career progression through the firm, because that’s often where the biggest issues arise, particularly when it comes to gender. You can have great women but it’s hard to help them move forward and retain them at key stages of their personal lives without making an effort. There, we focus on mentoring and support, formally and informally, as well as holding managers to account for progression in their teams, asking them how they are really looking at people that might have different backgrounds to their own.”

At Ares, Arrington has brought in a third party to undertake a full qualitative and quantitative assessment of where the firm is on DE&I, focusing on pipeline, maturity of the programme and inclusion. That has led to a three-year strategic plan.

“Specific to gender, a big win in the first half of this year was our roll-out in the US and UK of mandated diverse candidate slates at first-round interview stage,” she says. “We now seek a minimum of four candidates in the first-round interview and half of those have to be diverse in order for the hiring manager to proceed. If we can’t find that, we go through an exception process, looking at whether we can market the position through different organisations and so on to really ensure we are casting the net wide enough. Year-to-date that has led to us continuing to hire at or above our current representation.”

At European mid-market lender Kartesia, head of CSR and ESG Coralie De Maesschalck oversaw the launch last year of the firm’s Kartesia for Women initiative, which facilitates networking and raises the profile of female leaders in the business. “We wanted to inspire women to join the private debt industry, especially in investment roles,” says De Maesschalck. “The last study I saw showed only 14 percent of the corporate credit market is female, and that percentage is even lower in senior positions. We also want to continue to attract great talent to Kartesia, and diversity and inclusion is a very important topic to millennials and Generation Z.”

Making a wider impact

At Tikehau Capital, gender diversity has not been a major concern. Head of private debt Cécile Mayer-Lévi is one of a number of women in senior positions and women represent 41 percent of the firm’s employees.

Mayer-Lévi says: “At Tikehau level, we are by design a diverse organisation, both in terms of gender and diversity more broadly. We are something of an exception – investors are very much pushing this topic, realising that diversity delivers better performance, and when funds tell those investors they can’t find good women to hire, the large European investors in particular are saying ‘look at Tikehau – they manage to do it’.”

While there is careful regard for maintaining that diversity, the firm has turned its attention to making a bigger impact. “Within our portfolio, we have three borrowers that have female CEOs,” says Mayer-Lévi. “What’s important is that in management committees there is this direction to increase the number of women, and that’s why we have now factored an ESG ratchet into our finance solutions. That allows companies to benefit from a decrease in margin based on a variety of criteria, which depend every time on the underlying activity but may well include diversity and inclusion.”

Since 2020, Tikehau has completed 14 deals that have included ESG ratchets, though not all using gender diversity criteria. One that did was a loan to IT services firm Talan, where the interest on the loan will be lowered if the business increases management diversity.

Mayer-Lévi says: “We have been doing quite a lot of financing for IT consulting software companies where the proportion of women is often extremely low. We have a set of guidelines seeking commitment to increase that, with strong incentives to increase diversity at management level. That’s one of the criteria that’s often included and we see those sorts of arrangements becoming more common. We believe that our role as a sparring partner can effect positive change by negotiating relevant and ambitious ESG targets, and that these ESG ratchets will become market standard.”

“As an industry we need to do more to create the conditions for diversity”

Antje Hensel-Roth
Intermediate Capital Group

The private equity community has been supportive, she adds. “Sponsors were surprised when we first introduced the ratchet, but they like the idea that the price of the debt can be reduced so they have embraced it. We’ve had lots of positive feedback and they welcome our increased involvement. We need more interaction with more teams within a company than we ordinarily would have, in addition to the finance function, to monitor the ESG criteria, but overall we find good support among sponsors.”

Ares likes to use its influence to support change across its borrower community. Heltzer says: “Talking about systems and systemic change is something that inspires us, so we think about how we can use each of our channels of influence to bring the full weight of the Ares platform to advance things that are important to us. Our first priority is to lead by example, so we looked inward first before evaluating processes externally in the portfolio. It’s obviously a very complicated topic, so the fact that we are in the trenches grappling with some of the nuances puts us in a more credible position to talk to portfolio companies and private equity sponsors we serve through our lending platform.

“By doing this work at Ares corporate and in our equity portfolio, we generate a lot of intellectual property. With that foundation of understanding, we can scale that to our several hundred borrowers and private equity sponsors.”

Arrington adds: “On the debt side, I’ve already had deal teams reach out to ask if I can help support and get involved with their due diligence processes. I’ve had the opportunity to sit down with them, look at company DE&I metrics and meet with company CEOs. That’s where we have seen the most impact, and it’s a great competitive advantage. All these companies need to get better at this, and how many of their lenders will actually help them move forward with it?”

Regulatory alignment

At Kartesia, De Maesschalck says the EU’s Sustainable Finance Disclosure Regulation, along with investor pressure, has led the firm to upgrade the ESG questionnaire it shares annually with borrowers, and to expand its coverage to reach borrowers where Kartesia has acquired debt on the secondary markets.

“Up to this year, only our primary deals were filling in that questionnaire,” she says. “Now, we have created a questionnaire for our secondary portfolio companies too. That will be a bit more challenging, because we don’t always have access to management, but we will find a way. We have also aligned the questionnaire to SFDR, which includes seven gender diversity KPIs.

“We invest in small companies and some of them are not monitoring those SFDR KPIs. But portfolio companies know they can’t avoid this and reporting will soon be mandatory in order to find investors or get insured, so they welcome our help with it. We will have to report these metrics under SFDR in two years and I have no concerns with that timeline.”

With investors increasingly asking tough questions, progress could be rapid. Hensel-Roth says: “As an industry we need to do more to create the conditions for diversity – it’s something that every GP needs to work on, but I sense there’s a willingness to tackle this issue, both within standalone debt funds and within multi-asset businesses like ours.”