Aligning on DE&I best practice

As the industry’s focus on diversity deepens, ILPA’s Jennifer Choi says the association will continue to evaluate how it ‘sets the bar in defining what good looks like’.

Jennifer Choi

LP scrutiny of managers’ approaches to diversity, equity and inclusion has been gradually intensifying over the past few years. According to Private Equity International’s LP Perspectives 2022 Study, evidence of DE&I at the GP level forms a major part of the due diligence process for 28 percent of respondents, while 57 percent say it plays a minor role. Only 15 percent of investors do not consider DE&I during due diligence, down from 20 percent last year and 22 percent in 2020.

As the focus on DE&I issues continues to grow among investors, and indeed the wider private equity industry, the Institutional Limited Partners Association has been working to ensure its resources and member engagement initiatives are aligned with best practice in this area. To that end, it released an updated version of its Due Diligence Questionnaire and Diversity Metrics Template in November 2021. The changes, which followed a consultation period in August and September, are designed to better reflect market developments and the more detailed information LPs are seeking from GPs.

Here, ILPA managing director of industry affairs Jennifer Choi explains the rationale behind these changes and provides an update on the association’s Diversity in Action Initiative, signatories to which have increased more than four-fold since its launch in December 2020.

The ILPA DDQ 2.0 includes updates to the DE&I section, and changes have been made to the ILPA Diversity Metrics Template. Why were these changes implemented and what do they entail?

We initially published both the DE&I section of the ILPA DDQ and the ILPA Diversity Metrics Template just over three years ago in 2018, but we felt these updates were necessary to reflect how much industry behaviour has changed in a short period of time. We observed among ILPA members and our Diversity in Action signatories that the industry was deepening the level of enquiry around DE&I practices and policies, and taking a generally more sophisticated approach to assessing DE&I.

To ensure these changes truly did align with broader and evolving market practices, we pursued several avenues to incorporate industry comment and to vet our thinking along the way. These included a public comment period, direct engagement with other groups focused on DE&I, such as FCLTGlobal, and close engagement with our members, the GP community and DIA signatories across multiple working groups. Throughout this process we also sought to make changes that were not only right for today’s market, but that would anticipate the long-term arc for how LPs are engaging with their GPs on DE&I.

Specific changes that have been made to the template include a single set of globally relevant designations for race and ethnicity, the inclusion of a non-binary option on gender, additional self-identified dimensions of diversity, such as LGBTQ+ and persons with disabilities, a simplified structure for role designations across ownership and professionals, insight into staff movement, and select portfolio company level data. Changes to the template are intended to extend to and complement the qualitative information sought through the DDQ and should align with prevalent areas of LP enquiry specific to DE&I.

I am also delighted to share that we already know of several online platforms that have digitised the DDQ, which should help make it easy for managers to complete. Notably on the template, Nasdaq will collect DE&I data and make it available free of charge to investors based upon the ILPA Template. Clearly there is already a lot of industry momentum behind these updated documents.

How has the ILPA Diversity in Action initiative progressed since its launch in December 2020?

First, we have seen tremendous growth and industry support for the initiative. We started with 46 founding signatories and, as of 15 December 2021, this had reached 213. We are seeing mounting interest from LPs in becoming signatories as they walk their own journeys on DE&I, including the creation of a DE&I strategy and specific goals for recruitment, engagement and investment. Even LPs that do not yet have in place the required practices to become a signatory are encouraging their GPs to do so.

Secondly, the signatories are tremendously dedicated to this community and to sharing information with one another. This is clearly illustrated by the enthusiasm signatories have for our quarterly roundtables where attendance has exceeded 150-200 individuals on average. This has created a ‘good problem’, which is to keep these forums useful for signatories. To that end, one change we are considering in 2022 is segmenting our roundtables so that signatories are better able to talk with those that are in a similar place on their DE&I journey or with similar areas of focus and interest.

In terms of DE&I, what is on the agenda for ILPA and its members in 2022?

Increasing adoption of the ILPA DDQ 2.0 and the ILPA Diversity Metrics Template is chief among our priorities in 2022. We know that the DDQ is ILPA’s most downloaded resource, and we also know from our members that the template is both used and useful. Among the allocators in the DIA signatories network, 50 percent already use the updated template and many others are in the process of implementation.

Signatories and ILPA members alike also believe that we can continue to evaluate how we set the bar in defining what good looks like for DE&I. ILPA will support members’ and signatories’ articulated interest in exchanging best practices on bias/inclusion training and in making progress towards an industry benchmark for DE&I data. Over the course of 2022, we will continue to share learnings from this incredible and engaged community of practitioners, as well as insights into how the state of DE&I is evolving in the industry.