Private equity has long been a male-dominated industry, but a new one analysis suggests that its gender imbalance could impact the companies in which firms invest. The report reveals that companies that receive private equity backing experience a significant decline in female leadership.

Private equity firms specialize in identifying businesses that have untapped potential. By acquiring a controlling stake, firms gain influence over strategic decisions. By bringing in new leadership, streamlining operations and cutting costs, they seek to help the company reach its full potential and increase future earnings.

However, a new study reveals that when private equity firms bring a new leader into a beleaguered company, the new managers are overwhelmingly male. LCAP, a leadership consultancy, examined private equity-backed European companies and analyzed what happens to the company’s leadership after an investment in a private equity firm. Over the past year, private equity has exited 1,424 companies that were included in the study. As an example of the dramatic gender imbalance, only 2% of the chairs of these companies were women. “Given the chair’s critical role in setting strategic direction and overseeing the board’s entire function, this is particularly concerning,” the report’s authors write.

Overall, the percentage of women in leadership positions in companies fell by 20% during the holding period of private equity investments. “Further analysis indicates that this is driven by more men than women being employed during the retention period,” write the authors of the LCAP report. Indeed, they found that 80% of the new hires were men. “One explanation for this could be companies seeking leaders with prior private equity experience in turbulent conditions,” they add.

Women with experience in private equity might be hard to come by. A 2023 report from McKinsey points out how male-dominated private equity firms are. Although at the entry level, women hold a third of investment roles at these firms, only 15% of CEOs in private equity investment roles are women.

According to the McKinsey report, investment committees (ICs) within private equity firms are where investment decisions take place. “Discussions and decisions made in the periodic IC meetings form the intellectual backbone of PE firms. Therefore, who constantly sits at the IC table matters,” write the authors of the report. And who sits at the IC table? Men. Women make up only 12% of investment committee members.

Given this gender imbalance, it is not surprising that private equity firms select male leaders from within their own networks when making executive appointments. Research shows that people naturally gravitate towards hiring people who are similar to themselves, a phenomenon known as ‘homophily’. Additionally, given that private equity employees work primarily with other men, their existing networks are likely to be comprised of other men. Expanding beyond these networks not only requires additional effort, but also introduces an element of uncertainty—factors that can discourage more inclusive employment.

Indeed, the authors of the LCAP study conclude: “Because women leaders often join PE-backed businesses from outside the usual talent pool and through a diverse search process, failure to look beyond the ‘tried and tested’ may have exacerbated lack of diversity. for this cohort of businesses leaving.” In other words, private equity firms haven’t made the extra effort to look outside their networks.

Without conscious efforts to diversify their talent pool, private equity firms add to the barriers that prevent women from reaching the highest levels of leadership. To break this pattern, these firms must actively work to expand their networks and implement more inclusive hiring practices—steps that could have the added benefit of unlocking the full potential of their investments by ensuring that diverse perspectives are brought to the company.