Pensions, endowments, and other investors want to know how diverse the staff and senior management are at the private equity managers they use to deploy billions in capital.
To do that, the Institutional Limited Partners Association, a group that includes more than 500 institutional investors, has revised its due diligence questionnaire — referred to as the DDQ — and its diversity metrics template. The documents, which are standard forms that private equity firms fill out to help investors search for and vet managers, were last updated in 2013 and 2018. Private equity general partners and investors can comment on the drafts, which will be finalized and released in the fourth quarter, up until Sept. 24.
Most of the changes concern diversity, equity, inclusion initiatives. In the DEI section of the due diligence forms, ILPA added 12 questions, including on topics such as how firms are tracking and measuring diversity, and modified seven. Other new questions ask about firms’ willingness to require and implement DEI policies, the presence of a code of conduct that covers harassment, discrimination, and violence in the workplace, and implementation of policies that work to recruit and retain staff from underrepresented groups.
“In general, LPs want transparency,” Neal Prunier, ILPA’s director of standards and best practices, told Institutional Investor.
The revised questionnaire also prompts respondents to answer whether or not the firm is a Diversity in Action signatory. Diversity in Action is an ILPA framework in which signatories are required to track hiring and promotion data by gender and race or ethnicity and build practices that make recruitment and retention more inclusive, among other things. ILPA also added new questions and sections on cybersecurity, remote work, legal issues, political contributions, and other asset classes the firms manage aside from private equity.
According to the draft, the questionnaire and the diversity metrics templates are not meant to be adopted verbatim by all GPs in the industry. Instead, ILPA hopes the revised drafts will minimize variations in questions GPs are asked and help investors more easily compare firms.
“The due diligence questionnaire is going to have an impact on the decision-making process,” said Prunier. “Hopefully as GPs get more and more questions on certain things, they will understand that these things are important to LPs, and that will, in turn, shape behavior. But the DDQ is designed specifically to help LPs make decisions during the investment process.”
For ILPA partners, like the Massachusetts Pension Reserves Investment Management Board, this means there may be some information overlap in due diligence and diversity questionnaires, Eric Nierenberg, PRIM’s chief strategy officer, told II. But, overall, Nierenberg said he believes the updates will help further align the interests of LPs and GPs.
If the industry can gather better data, then “we can build more robust reports that we can then provide to our investment committees or our boards of trustees,” Nierenberg said. “Each of these pieces, incrementally, helps build a better and more robust investment process. Collecting good data on things like ESG and diversity is a critical first step in being able to make advancements.”
At MassPRIM, Nierenberg said the investment team has been trying to increase information and transparency surrounding DEI initiatives, a push that he said is reflective of the broader institutional environment.
“A lot of this is driven by the changes that have happened in the industry and the markets and the world as a whole,” Prunier said. “The DDQ needed to have a comprehensive update to modernize it relative to industry practices.”