Due Diligence Questionnaire
The ILPA Due Diligence Questionnaire (DDQ) was designed to ease the administrative burden placed on private equity LPs and GPs by standardizing the most frequent diligence questions posed by investors.
With increased focus on issues related to alignment of interest, governance, and transparency, the level of detail required by LPs for their fund diligence process has grown. Without question-standardization, the industry faced a proliferation of custom questionnaires, requiring GPs to provide customized answers to each. The ILPA DDQ simplifies this process, freeing up manager resources to provide more in-depth responses, as needed.
The ILPA DDQ covers many topics related to fund diligence, including:
- General Firm Information
- General Fund Information
- Investment Strategy
- Investment Process
- Alignment of Interest
- Market Environment
- Fund Terms
- Firm Governance/Risk/Compliance
- Track Record
The ILPA’s goal is to reduce the administrative burden of LPs, GPs, Placement Agents and other third parties by providing a best-in-class due diligence questionnaire. Adoption will make questionnaire stage more efficient by minimizing the number of customized DDQs from LPs and consultants.
2. Is the industry required to use this document?
No, the ILPA understands that this document may not necessarily be applicable for all funds, or provide efficiencies for all parties. However, GPs that receive multiple questionnaires, with redundant and differently-organized questions, should see efficiencies in the diligence process.
3. How should GPs with funds for different strategies/geographies/industries (e.g. separate venture and growth funds) answer questions about the firm, and its funds and teams that aren’t currently fund raising? What level of information is relevant to LPs if they are only conducting diligence on a specific type of fund offered by a GP?
In these situations, the GP does not necessarily need to provide detailed information about business units that are materially unrelated to the Fund. (A simple overview of these non-related business units should be made available, however.) Unless specifically noted, any reference to the “Firm” in the ILPA DDQ should be focused on business units materially related to the Fund. GP’s should clearly state the business units being included and be able to explain their rationale for excluding others.
4. Are GP’s expected to provide answers to any “sensitive” questions in this document?
GP’s are not required to divulge sensitive information, especially if it violates any non-disclosure agreements with other parties. It is also understood that GPs may need to use caution in providing information to organizations they feel are not genuinely interested in committing to their fund. However, as fiduciaries, Limited Partners should not feel restricted from asking sensitive questions. The GP’s right to guard confidential information is no greater than the LP’s right to inquire about information they feel is relevant to the transparency and alignment of their potential partnership. If GPs are more comfortable with providing certain answers in person, in a redacted format or at a later stage in the diligence process, they should feel encouraged to do so. However, they should also provide an explanation for their rationale, as well as any further direction for LPs, in this document.
5. Are GPs expected to answer questions that are not applicable to their specific fund?
The ILPA DDQ is an attempt at a comprehensive questionnaire that applies to the majority of private equity funds. LPs should understand that not all questions are applicable to all GPs/funds. GPs should use their best judgment to only answer questions that are relevant to their organization. For skipped questions in the Detailed Questions section, GPs should provide a brief, one sentence statement explaining their rationale for not answering. For the skipped questions in the Basic Questions section, “N/A” should be populated in the “Reference” field.
6. Should LPs use a GP’s answers in the Basic Questions section (yes/no questions) as the sole criteria for their ultimate investment decision?
No, the basic questions are intended to provide LPs with a top-level checklist, and a framework to highlight issues that need further clarity. There may be extenuating circumstances that explain a particular “negative” answer. GPs should use the “Reference” field in the Basic Questions section to direct LPs to more expanded answers to these questions. LPs should review the expanded answers in the Detailed Questions section, as well as their own follow-up questions, before making any investment decisions.
7. Should LPs only use this document? In what format should additional questions be sent to the GP?
One of the goals of this document is to minimize, not eliminate, the variations in LPs’ diligence processes. While the ILPA believes that this is a comprehensive document that covers all of the questions that institutional investors should ask GPs, it may be necessary to supplement this document with additional questions. Additional questions should not be added to this document. To avoid any confusion, these questions should be listed in a separate document.
8. In various questions related to the Firm’s staff, the form references both “Principals” and “Team Members.” What is the difference between the two? For the purposes of this document, what criteria should a GP use to define each?
As referenced in Appendix B, “Team Members” refers to all Firm-personnel, including investment professionals and senior non-investment professionals that left the Firm in the last ten years. “Principals” refers to the Firm’s management team and other core members that have a significant contribution to the Firm’s direction and investment performance. The “Principal” designation should be made at the GP’s discretion. However, GPs should be prepared to answer any questions about their decision rationale.
9. Can GPs cite responses in their PPMs in the ILPA DDQ?
It is recommended that all answers should be contained in the questionnaire. Any relevant answer in the PPM should be copied into the DDQ to preserve the DDQ as a stand-alone document.