LPs rush to use new tool to measure GP diversity

Greenspring Associates joins CalPERS and NY Common in using software developed by Lenox Park Solutions to measure diversity of fund managers and portfolio companies.

There is a new metric to add to your pitch deck along with your IRR, DPI and TVPI.

LPI, short for Lenox Park Diversity Impact Score, measures diversity, equity and inclusion (DEI) at asset managers. Just like lenders look at a FICO score to determine a person’s creditworthiness, asset allocators can look at a manager’s LPI score as a sign of how well it is doing with DEI, said Jason Lamin, CEO of Lenox Park Solutions.

The Austin fintech firm rolled out LPI last November after about four years of development. Despite its newness, some major limited partners are already incorporating LPI into their venture capital and private equity programs. The latest LP to ask its managers to participate in the program is Greenspring Associates, one of the most active investors in venture capital funds, with more than $11 billion in assets under management. The $410 billion California Public Employees’ Retirement System and $216 billion New York State Common Retirement fund are also using LPI.

Lamin is pleased but not surprised by how quickly the diversity measurement tool is taking off. “This is a business that is driven by metrics,” he said. “One of the things that has been missing from the whole DEI conversation is standardization, and that comes down to some form of measurement.”

Jason Lamin, Lenox Park Solutions
Jason Lamin, Lenox Park Solutions

His hope is that investors will one day adopt LPI as one of their fund investment criteria. “This is how we can hold folks accountable for real change,” Lamin said. “If you’re looking to raise capital and you know you need a minimum LPI score, you will go and figure out how to get more women and people of color in your workforce.”

About 600 managers have received LPI scores so far, with about 30 percent of them being private equity funds and a handful being venture managers. By the end of the year, Lamin hopes to have 800 to 1,000 managers with LPI scores, including 80 to 100 venture firms.

It will get a big boost from Greenspring, which focuses solely on venture capital investments through fund, direct and secondary deals. Greenspring aims to get LPI scores for most of its 125-plus VC managers and 100-plus portfolio companies by the end of the year. The Baltimore area firm’s fund portfolio includes such brand names as Accel, Battery Ventures, Benchmark, Bessemer Venture Partners, DCM Ventures, Founders Fund, Foundry Group, Frazier Healthcare, IDG Ventures, Insight Venture Partners, Lightspeed Venture Partners, New Enterprise Associates and True Ventures.

To obtain LPI scores for their managers, limited partners must subscribe to Lenox Park’s RoundTables, a cloud-based platform for asset managers and allocators. Once an LP subscribes to the platform, its fund managers and their portfolio companies are invited to enter data about the gender and ethnicity of owners, leaders and overall workforce of the fund and/or portfolio companies.

For example, they are asked how many and what percentage of a general partnership’s owners are women and/or people of color. Lenox Park also asks about the gender and ethnicity of the investment team, as well as the gender and ethnicity of a firm’s overall workforce and its leadership team.

Once collected, the data is analyzed and condensed into 10 sub-scores measured from zero to 1.0. The individual sub-scores are then combined for an overall score of zero to 10.0. The final LPI score and sub-components can be benchmarked against various peer group categories, such as asset class, AUM range and geographic region. (For a more detailed look at LPI, see Lenox Park’s white paper.)

GPs responding positively

Greenspring’s immediate plan for the LPI data is to incorporate it into due diligence for new managers and as a starting point for “conversations about DEI considerations with existing fund managers and portfolio companies,” said partner Seyonne Kang.

Down the road, the firm hopes to combine the diversity data with performance data for its funds and direct investments. “Through performance data, we also want to demonstrate the value of a broad view on diversity in the investment sourcing, due diligence and risk management processes,” Kang said.

So far, GPs are responding positively to Greenspring’s request for them to get an LPI score. “It’s still early days, but the overwhelming response from our managers is that they want to be a part of the progress we are hoping to drive in the innovation economy,” Kang said.

Should a GP should be worried if it gets a low LPI score? “This is not meant to filter out managers, but instead allow us to make informed decisions regarding the alignment of our investments with our broader strategy and help improve over time those where we can be supportive with our network and resources,” Kang said.

Boosting industry diversity has been top of mind for Greenspring for many years. Firm co-founder Ashton Newhall co-chaired the National Venture Capital Association’s Diversity Task Force with Kate Mitchell of Scale Venture Partners in 2014. Greenspring also teamed up with the NVCA in 2018 to launch the Limited Partner Office Hours Program to help educate diverse VC fund managers.

“We have historically incorporated diversity and inclusion considerations in our [investment] process, requesting elements of the survey information as part of our annual due diligence questionnaire and including a diversity rider in our term sheets for almost two years now,” Kang said.