Why key person clause matters
Private strategies can depend heavily on particular investment leaders. The clause gives investors governance protection when the team responsible for underwriting and portfolio decisions changes materially.
How it is applied
Documents identify key people, time-commitment tests, trigger combinations, notice, cure period, replacement approval, suspension of new investments, termination rights, and advisory-committee authority. Fund documents name covered individuals, define departure or reduced involvement, and state consequences such as suspension of new investments, consultation, or termination rights. Investors assess whether the named team actually drives sourcing, decisions, relationships, and risk management.
Portfolio example
Two named partners leave during the investment period. The key person event automatically suspends new deals until investors approve replacements or the agreement’s remedy is completed. A private fund names two founders as key persons. One leaves and the other cuts time below the required threshold, triggering suspension of new deals until the advisory committee approves a replacement plan or investors vote to resume.
How to interpret it
A clause does not guarantee team continuity. Its value depends on realistic triggers, timely disclosure, meaningful remedies, and an investor body capable of acting. The clause protects against material dependence on particular people. A broader team and credible succession plan may reduce key-person risk. Strong rights require objective triggers and meaningful investor remedies, not merely manager notification.
Limitations and common misconceptions
Definitions can be narrow, departures staggered, and replacements formally qualified but economically different. Illness, reduced attention, succession, and team depth may not fit a simple departure test. Illness, informal disengagement, garden leave, and internal role changes can be difficult to classify. Waivers may be negotiated under time pressure. The clause cannot replace evaluation of culture, retention, ownership, governance, and succession. A strong clause also addresses multiple departures, replacement approval, notice timing, and what happens to fees while investment activity is suspended. Advisory-committee discretion can be helpful but may dilute protection if standards are vague. Investors should compare the named individuals with actual attribution, sourcing, and committee records to ensure the clause covers the people whose absence would matter.
Sources and further reading
- ILPA Principles 3.0Institutional Limited Partners Association
- Alternative InvestmentsCFA Institute