Bringing gender equality within reach in UK investment managers

Gender diversity matters not just for the sector itself, but also because of the influence investment managers wield as investors, driving gender equality as allocators of capital. However, as Figure 1 shows, managers still consistently allocate more venture capital to male-led investees than those led by women.

Indeed, as research from the British Venture Capital Association (BVCA), the British Business Bank and Diversity VC shows, female founders are significantly under-represented in UK venture capital investment pipelines¹. For every £1.00 of VC investment made in 2017, the study found that all-male founder teams received 89p, with mixed-gender teams receiving around 10p, and all-female founder teams receiving less than a penny.

The seeming ‘magnetism’ of male-led investee firms could be the result of a lack of female founders, a lack of female investment managers, or both. While there has been some improvement over the past six years, with 7p of every £1.00 raised by VC funds going to all women-owned management companies by 2023, there is still more work to be done².

While most C-suite roles held by women may not lead to the CEO or CIO’s corner office, women are taking seats on boards and delivering a positive impact with the different perspectives that they bring³. For example, the Financial Times reported that “female board members prioritise action on climate change far more than men”. Hence, by driving greater gender diversity on their boards and across the leadership of investee companies, investment management firms may also accelerate the achievement of their sustainability targets.

Beyond the potential benefit of achieving ESG targets from more balanced boards, encouraging more female entrepreneurs could unlock £250bn value for the UK economy if women started and scaled new businesses at the same rate as men, according to the Rose Review⁴. While women-led companies represented 20% of all businesses in the UK in 2022, up from 16% in 2018, a lack of awareness about funding options and investor bias are impeding the growth of female-founded businesses. Investors tend to focus more on potential risks when investing in these businesses, whereas they focus more on potential benefits when investing in businesses owned by men. Training investment teams on unconscious bias can help encourage a more diverse set of views within investment committees.

Campaigns like “women backing women”, “Awaken Hub” and others are encouraging women to be angel investors by educating and supporting women across the UK. The Seed Enterprise Investment Scheme (SEIS), a government-backed tax incentive scheme introduced in 2012 to encourage investors to fund start-ups, has been extended to companies trading for three years. From April 2023, founders could access up to £250,000 funding under the SEIS rather than £150,000 previously, and investors can now commit £200,000 annually (previously £100,000) to SEIS.

The UK government has recently reversed its decision to raise the income and asset thresholds for the promotions of investments to angel investors. The reversal of its decision addressed concerns raised by investors and technology companies that the original proposal had a disproportionate impact on female investors – more of whom would have been excluded from the opportunity to provide angel investment because of the proposed thresholds. Given that female investors are more likely to invest in female led businesses, this exclusion risked affecting significant numbers of female founders and their businesses, as well as female investors. The eligibility criteria have now reverted to previous levels, with an income threshold of £100,000 and a net assets threshold of £250,000⁵.
 

How can wealth managers best meet the needs of a growing female client base?
 

When it comes to wealth management, according to a report by the Centre for Economic and Business Research, 60% of UK wealth is expected to be held by women by 2025, driven by the rise of female entrepreneurs and career women, and the fact that women often outlive their husbands⁶. According to the Investing and Saving Alliance UK, female consumers are 8% less likely than men to invest, with a statistically significant 'gender effect'. Three quarters of women prefer saving in a bank account over investing in bonds and equities because they tend to be more loss-averse, and to take heed of warnings around financial risk. The unfortunate consequence is that they are more likely to overestimate the probability of realising a loss from equity investment, and thereby miss out on the long-term out-performance of equities. They are also less likely to believe that “people like them” invest money, expecting instead to simply save money in more traditional ways⁷. Wealth managers need to rethink their approach to attract, retain and recognise the specific needs of growing numbers of female clients. To provide effective financial advice to women, it is important to understand their unique circumstances, potential barriers to engagement, and relative lack of opportunities for financial education and empowerment. The growing preference for female advisors among female investors could act as an organic catalyst for gender equality in the wealth management industry, driven more by demand ('pull') factors than supply ('push')⁸.
 

Conclusion
 

Investment management firms are a key starting point for those striving for greater gender equality in business and society, not only for the social and business benefits associated with gender equality, but also for the potential positive impact on society through capital allocation. In this way, by pursuing their ESG goals, investment managers can have an outsized impact on gender equality across the entire economy. While progress has been made in terms of female representation, there is still much to be done to nurture the next generation of female talent and create a transparent pathway for female leaders, especially for fund manager roles.

Managers seeking to accelerate their progress towards gender balance need to define clear paths to the top for their female talent, increase the visibility of female role models, and encourage men to be allies. In doing so, the sector would be better placed to achieve equality in female leadership. It needs to go beyond demographic diversity metrics and capture cognitive DEI through holistic measures. And continual assessment of D&I policies is necessary to support the advancement of women across the talent cycle.

Firms also need to take action to overcome the barriers of slow progress. This includes broadening the candidate pool, empowering, and retaining talent, implementing flexible work models, creating a supportive workplace, fostering an inclusive culture, closing the gender pay gap, and investing in change.

The regulatory focus on D&I could create a positive impetus towards gender equality, as it will inevitably make diversity a firm-wide and regulatory matter. This will likely result in greater attention and larger budgets being devoted to diversity initiatives that will drive regulatory compliance and competitiveness. What is clear, nonetheless, is that only through coordinated action, and a shared commitment, will the required change happen.