LPs use personality tests as part of GP due diligence

Every year institutional investors sift through scores of existing and new private equity funds to engage and select potential managers. The usual steps include reference checks, team background and bios, team attrition, track record and fund strategy. All are important but often hard to quantify.

So how do you improve the process?

Enter Texas Municipal Retirement System’s innovative attempt to quantify and objectively assess team quality and stability.

As I reported, TMRS’s Christopher Schelling, director of private equity, 1 1/2 years ago initiated assessments tests for GPs. The tests are administered to senior team members. Nearly 50 GPs have taken the online test by Profiles International to date and they have not pushed back.

“Many view it as free HR advice,” said Schelling.

Two GPs I spoke with opined that LPs may be exploring other innovative methods on evaluating fund managers. Their investors have not yet asked them to take the tests but they said they’d have no problem taking one.

The relationship of a GP and institutional investors is a long-term one and both objective and softer parameters will influence the relationship, said one GP.

“As part of the due-diligence process, these tests can help form a point of view. The caveat is that they can only be supportive, not definitive,” he said.

Perhaps the most value the test can add is in the key-man clause, said the second GP. If a key man leaves, LPs will have an opinion on the manager that would be best suited to the relationship.

If the exiting manager was a great one, the LPs will want similar characteristics. “If the relationship was fractious, the investors will know what they definitely don’t want in the incoming manager,’ said the GP.

Some popular personality tests are TalentQ, Insights, OPQ, Profiles, Caliper and Hogan assessments, according to Suruchi Tripathi of People Tree, an independent C-suite testing-service firm. Tripathi conducts deep-dive assessments for C-suite managers for her clients.

A typical assessment measures the test scores on a range of criteria for senior executives in similar roles, Tripathi said. Comparing scores on personality traits like decision-making, aggression, skepticism, social skills and managerial styles provides insights into how the manager will perform in isolation and with the team, she said.

TMRS’s initiative is unique to the institutional-investor landscape, but vendor assessment in critical relationships is fairly common in banking, Tripathi said. She herself had to undergo an intensive test to become a vendor for the banks she consults.

“I had to be tested before I could test them,” Tripathi said.

Have you ever taken such a test? Do you think they are useful? Why or why not? What do you see as the important criteria for assessment? As private equity investing becomes more mainstream for institutional investors, what innovations do you think will become part of the process? Send me any thoughts, comments or feedback at psingh@buyoutsinsider.com, LinkedIn or Twitter @singps.

Surfer Joao Demacedo heads to a surfing spot at Martin’s Beach, a popular surfing and fishing spot, in Half Moon Bay, California, on March 14, 2013. Photo courtesy REUTERS/Robert Galbraith