The LP responsible investment due diligence questionnaire (DDQ) is a tool to establish dialogue between LPs and GPs.
Limited partners (LPs) should first establish their own expectations and processes around responsible investment before they can engage with their general partners (GPs).
A GP’s Private Placement Memorandum, Offering Memorandum, or any introductory marketing materials may allow an LP to establish whether a GP’s fund mandate addresses ESG considerations. Before conducting more detailed due diligence through the LP Responsible Investment DDQ, an LP may wish to establish responses to the following questions:
- Does the fund have a formal policy to exclude investments in any sectors or geographies, or based on any ESG criteria?
- [If the LP has an exclusions policy] Does the scope of the fund mandate potentially include areas of investment that would conflict with this policy? [If so] Would the GP be willing to ensure that the LP fs capital is not used for such investments?
- Does the fund target sectors or geographies that have specific ESG risks and/or opportunities that the GP plans to pay particular attention to during the investment analysis and/or due diligence process?
LPs are also encouraged to check for any publicly available information on the GP’s approach to responsible investment at this initial stage. If the GP is a PRI signatory, LPs can search for their latest public PRI Transparency Report on the PRI website.
Taking into account the diverse nature of the private equity asset class, an LP should discuss with the GP how their approach to ESG integration is influenced by their investment strategy, by establishing responses to the following types of questions:
- How does your approach to integrating ESG factors vary whether you make a minority or majority investment?
- How does your approach to integrating ESG factors vary depending upon the stage of company growth cycle that you might target?
- What is your approach to considering ESG factors in the context of secondary investments, and why?
Different funds will have different exposures to ESGrelated risks and opportunities, and different GPs will have different capacities, leverage and management approaches for addressing ESG issues. An LP should take these considerations into account when assessing the GP fs responses to the DDQ and in the ensuing dialogue.
Funds of funds
When investing in a fund of funds, an LP should have assurance that there is a thorough process in place to assess and monitor the underlying funds on their approach to responsible investment. An LP could ensure that the fund of funds manager uses the LP Responsible Investment DDQ as a basis for the ESG due diligence of the underlying funds and reports the collected information back to the LP. An LP could also ask a fund of funds manager to complete the LP Responsible Investment DDQ during fundraising (noting that Section 3 would not be applicable).
When investing in secondary funds, an LP should have assurance that there are appropriate processes in place to integrate ESG factors into investing at the indirect and direct level(s). An LP could ask a secondary fund to complete the LP Responsible Investment DDQ during fundraising (noting that Section 3 may not be applicable).
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