Diversity, (private) Equity, and Inclusion: Why Investors are Betting on DE&I

From the #MeToo movement to Black Lives Matter, the past few years have brought issues of diversity, equity, and inclusion (DE&I) to the forefront of public consciousness. The phrase ‘Diversity and Inclusion’ has recently seen exponential growth in usage (see Figure 1), but it is no longer just a buzzword – it is a strategic imperative. Today, younger generations place greater value than ever on working for, and doing business with, companies that reflect their values. According to a recent ADP study1, 68% of UK workers would consider looking for a new job if their company lacked a diversity, equity and inclusion (DE&I) policy or had a gender pay gap. And as the importance of DE&I continues to grow, so does the opportunity to invest in consultancies and other service providers which help businesses stay ahead of the curve and meet the evolving demands of stakeholders.

Figure 1: Timeline of the DE&I Movement by Prevalence of Terms

Percent of Total Words Published in English x107; SOURCE: Google Ngram Viewer; Google Books Database

Reputational risk to brand value, stringent equal opportunities legislation, socio-political movements, and younger generations’ keen interest in firms’ values all continue to drive forward the DE&I agenda, putting greater pressure on companies and institutions to act. However, embracing diversity need not be a course of action reluctantly taken by executives in the face of vociferous investors, employees or customers. There is a clear business case. A McKinsey study has shown that companies with greater executive team gender diversity are up to 25% more likely to outperform their less diverse peers; for ethnic diversity, this figure rises to 36%2. And companies shouldn’t stop once they’ve built a diverse workforce. To reap the rewards of a firm’s employee base, building an inclusive culture – where all individuals feel valued and have equal opportunity for success – is fundamental. Gartner research suggests that, in high-diversity environments, inclusivity can improve team performance by up to 30%3.

There have been some challenges to McKinsey’s report, which points to correlation rather than causation, but weight must be leant to the considerable, and ever-growing, body of literature which strongly supports its findings. Access to the best and brightest minds is only possible when your talent pool is not falsely constrained, and diversity of thought and varied ways of working are surely a clear path to innovation and success. As Matthew Syed posits in his book on the topic, Rebel Ideas, “collective intelligence emerges not just from the knowledge of individuals, but also from the differences between them.”4

DE&I Services: Define, Implement, Evaluate

Figure 2: DE&I Services Value Chain

Illustrative & Non-Exhaustive; SOURCE: Fairgrove Analysis

It’s one thing to understand the benefits of diversity and inclusion, but another to capitalise on the opportunity they present. PwC’s 2022 Global DE&I Survey revealed that, while 85% of businesses consider DE&I a stated value or priority, more than half of companies consider their current DE&I programmes ‘basic’, and just 5% consider them ‘differentiated’5. The provision of DE&I services aims to bridge the gap. At their simplest, these involve helping organisations and institutions to formulate, implement, and evaluate their DE&I strategies. Formulation of a strategy should establish tangible aims for a DE&I programme and ensure that progress can be measured, while evaluation is likely to comprise both quantitative and qualitative analyses of a company’s DE&I performance. Implementation is the broadest bucket within this value chain, encompassing everything from consulting, coaching, training programmes, and seminars, to marketing and communications, and changing recruitment processes. Moreover, the services on offer are ever-expanding, reflected in the rapid growth of DE&I e-learning and the rising penetration of diversity analyses of suppliers, suggesting a strong runway for continued product and service innovation.

DE&I Specialists: An Opportunity for Consolidation?

Figure 3: UK DE&I Market Landscape

Illustrative & Non-Exhaustive; SOURCE: Fairgrove Research

The breadth of services on offer is matched by the wide-ranging vendor set, which spans from independent consultants and small DE&I specialists, all the way to multinational professional services firms. The latter group, which includes the Big 4, generally offers DE&I consulting as part of human capital management operations. Large consultancies, such as McKinsey, BCG, and Bain, help firms to define their DE&I strategies, often as one component of larger organisational change projects, while HR consultancies and executive search firms play a part in addressing shortfalls within recruitment. Challenging these blue-chip advisory and business services firms are the DE&I specialists, typically operating as boutique, founder-led consultancies. Compared with the largest of their competitors, these specialists are generally lower-cost alternatives and can provide additional depth of expertise within particular niches. The professionalism of these vendors also provides client organisations with a credible commercial solution which may not be available from more ‘grassroots’ membership organisations.

This segment of the market is highly fragmented, characterised by numerous smaller-scale players: there is clear opportunity for market consolidation. In fact, despite its relative nascency, the UK market has already seen some M&A activity from both private equity and trade investors. The table below outlines a number of the more recent acquisitions and investments6:

Figure 4: Recent UK DE&I Investments and Acquisitions

TargetDescriptionAcquirer / InvestorDate
Marshall E-LearningE-Learning Course ProviderCiphrApril 2023
CognassistNeurodiversity Assessment PlatformGresham HouseApril 2023
Inclusive EmployersDE&I Consultancy & Membership OrganisationPalatineOctober 2022
YSC ConsultingLeadership Strategy ConsultancyAccentureAugust 2022
Challenge ConsultancyDE&I Training & Consulting ProvidereQSJanuary 2022
Talking TalentDE&I Coaching & Development ProviderBridgesOctober 2021
EW GroupDE&I Training & Consulting ProvidereQSJuly 2021
PDT Global (GP Strategies)DE&I Training & Consulting ProviderLTGFebruary 2021
SOURCE: Fairgrove Research

While these smaller firms can all be broadly classified as ‘DE&I specialists’, digging deeper reveals considerable variation in their business models and approaches to work. For example, Talking Talent (invested in by Bridges, supported sell-side by Fairgrove) mostly provides one-to-one and group coaching sessions, with a focus on support for working parents or carers, and leadership training for women and diverse talent. Contrastingly, Inclusive Employers (invested in by Palatine, supported by Fairgrove) offers training, consulting services, and webinars, as well as a workplace accreditation, the ‘Inclusive Employers Standard’. Its membership model offers the added benefit of a recurring revenue stream, while its creation and management of the National Inclusion Week provides a focal point for accelerated market education and business development.

What both firms have in common, however, is the ability to build strong and lasting relationships with clients, given the delicate – and ultimately very ‘human’ – topics they are tackling. And, since the work is generally consultative in nature, specialists can attain EBITDA margins above 20%. With sticky relationships and high margins, it is little wonder that these businesses are attracting interest from PE and trade buyers alike. 

Master of All Trades? Addressing Different Areas Within DE&I

Just as specialists’ business models vary, so too do the DE&I topics which they seek to address. In the UK, under the Equality Act 2010, people are protected from discrimination on account of nine characteristics: age, gender reassignment, being married or in a civil partnership, being pregnant or on maternity leave, disability, race (including colour, nationality, ethnic or national origin), religion or belief, sex, and sexual orientation. Some organisations, such as Pearn Kandola, EW Group and Inclusive Employers, aim to differentiate by offering services that span all these areas. Primary research carried out by Fairgrove suggests that many clients appreciate this ‘one-stop shop’ approach, and that a wide-ranging offering does not necessarily preclude depth of expertise. In any case, these firms often consider it reductive to view DE&I work through the lens of the nine protected characteristics alone. In addressing a broader spectrum of areas, a fundamental aim of these specialists is to develop inclusive cultures for all, without championing a particular subsegment.

This is not to say that there is no place for experts within one field. Organisations such as Do-It Profiler, Genius Within, and Cognassist (recently invested in by Gresham House, supported by Fairgrove) specialise in neurodiversity, which some commentators might consider a subset of the disability characteristic. Within the specific niche of neurodiversity assessment and training, firms able to point to thorough academic research can more easily win over clients, who place importance on the scientific accuracy of providers’ findings and solutions. It is vendors which focus solely on neurodiversity that are better-positioned to spend time and resource on assuring their clinical credibility than providers which offer neurodiversity assessments alongside a host of other DE&I services. And while current addressable markets can be relatively small in these niches, rapidly increasing penetration rates, driven in part by businesses looking to harness neurodiverse talent (see Figure 5), result in commensurately impressive market growth rates.

Figure 5: Examples of Companies Harnessing Neurodiverse Talent

Non-Exhaustive; SOURCE: Company Websites & Press Releases

And whichever category a provider falls into – either ‘broad’ or ‘niche’ – it is likely to benefit from the ever-changing nature of the DE&I market. Market participants are quick to highlight how areas which are more hotly debated today, such as trans issues, were addressed far less frequently 10-15 years ago. For DE&I specialists, and prospective investors, this suggests the future is full of opportunity: organisations and institutions are unlikely to view DE&I as an area simply ‘checked off’, since there will be always be the need to navigate the challenges of tomorrow.

DE&AI: How Technology Is Impacting The Sector

Since the pandemic, as with many other industries, use of technology has fundamentally altered the DE&I sector. Due to the number of organisations interested in DE&I services, providers have rapidly digitalised distribution methods and training content to deliver more effectively at scale. Be it the proliferation of e-learning modules on everything from unconscious bias to menopause awareness, or the shift from face-to-face to online coaching, DE&I specialists have embraced, and often benefited from, this mini technological revolution. Now the post-pandemic dust has settled, it’s worth highlighting a couple of areas that have some of the greatest potential for further disruption: data analytics and AI.

The benefits of firms’ growing desire for more sophisticated data analytics and reporting are two-fold. Firstly, it offers significant potential as an additional revenue stream for forward-thinking DE&I consultancies which are investing in technology and looking to leverage the significant quantity of employee data they already hold. Secondly, and perhaps more interestingly, the resulting reports, which may flag under-representation of a particular demographic in one area of the business, are likely to further boost demand for DE&I services, which help firms to redress these imbalances. This creates a positive feedback loop for providers of these services (see Figure 6). Moreover, some reporting may soon be mandated by law, moving from ‘nice-to-have’ to necessity. An FT article recently highlighted this issue, with a focus on pay gap reporting: “the UK should be thinking about expanding reporting requirements to include mandatory ethnicity and disability pay gap reporting. Data is crucial for industry benchmarking, as well as for showing problems that need to be addressed.”7

Figure 6: DE&I Data Analytics Feedback Loop

Illustrative; SOURCE: Fairgrove Research

Compared with data analytics, AI remains something of a ‘new kid on the block’. Since ChatGPT captured popular imagination in November 2022, however, there has been no shortage of people citing AI as the answer to all of our ills. And there is a case for believing that AI can help us to boost inclusivity in the workplace and beyond. At a basic level, AI tools can help us to spot and revise biased language in job adverts, emails, social media posts, even thought leadership articles. Going forward, its ability to objectively quantify employees’ performances should help to create more genuinely meritocratic workplaces. However, stories of bots ingesting Twitter data and soon generating content which is racist, misogynistic or homophobic highlight that AI’s application in this field is not without risk. Where AI is trained by a non-diverse group of people or a dataset containing underlying social biases it may lack the requisite capabilities to function as a genuinely useful DE&I tool. And this is a very real danger: a 2021 BCS report found that just 15% of people in the tech sector are from ethnic minorities, while only 10% have a disability8. At this early stage, it is difficult to predict what lies ahead for AI. While Syed’s argument that “teams of rebels beat teams of clones”9 holds true, it is no small irony that we may in fact unlock the full potential of our ‘collective intelligence’ by working hand-in-hand with robots.

DE&I Investment: A Smart Bet on a Bright Future

So, what does the future hold for DE&I services? Given the turmoil of the past year and current macroeconomic outlook, budgets are being squeezed across the board. Spend on DE&I services – which variously comes out of overall HR / Organisational Development budgets or specific DE&I budgets – will not be totally exempt from these cost-cutting exercises. However, Fairgrove interviews with market participants and key decision-makers suggest that, in many cases, DE&I spend is defensible and not the first budget to be slashed in a crisis. Since DE&I is often stated as a strategic priority, impetus for change often comes from near the very top of organisations, and leaders are aware of the negative press associated with cutting a DE&I budget. More importantly, however, they also increasingly understand that a strong DE&I agenda will help their firms to navigate tougher economic times, since a diverse employee base and inclusive culture will ultimately lead to company outperformance. And for those looking further ahead, to the end of the investment horizon, we foresee no shortage of exit opportunities. DE&I is a natural adjacency to other consultancy or HR services, hence potential trade buyers may include anyone from the Big 4 and SHREK executive search firms to employee benefits and HR tech providers.

As DE&I continues to prove its value in driving organisational success, it’s clear that the future belongs to those who embrace its principles and prioritise its implementation.


Our Experience

If you would like to discuss this article or are considering investing in the DE&I market or any other areas in which Fairgrove has experience, please contact Patrick Woodrow, Charlie Allen or Bhavna Dewan


Footnotes and Sources

1 ADP: ‘People at Work 2022: A Global Workforce View’

2 McKinsey: ‘Diversity Wins Dataset’, May 2020

3 Gartner: ‘Technologies Are Critical for Inclusion in the Workplace’, August 2018

4 Matthew Syed: ‘Rebel Ideas’

5 PwC: ‘2022 Global DE&I Survey’

6 Sourced from company websites and press releases

7 Financial Times: ‘Recession is no excuse for going backwards on diversity’, December 2022

8 BCS: ‘BCS Insights 2021’, August 2021

9 Matthew Syed: ‘Rebel Ideas’

Photo: Clay Banks / Unsplash