1. Understanding Key Person Provisions : Definition and Purposes
Key person clauses have become a standard feature in limited partnership agreements (“LPA”)across private equity, venture capital, and other closed-end investment fund strategies. These provisions reflect a simple reality: behind every investment fund commitment lies a vote of confidence, not just in the strategy, but in the individuals responsible for executing it.
A typical key person clause identifies one or more individuals, often the founders, managing partners, or senior investment professionals, whose continued involvement is considered essential to the investment fund’s success. These individuals are formally designated as “Key Persons” in the LPA.
The number of Key Persons can vary significantly depending on the profile of the manager. Emerging managers may designate only one or two individuals, while established firms, particularly those managing multiple strategies such as private equity, venture capital, or private credit, may name several Key Persons often tied to the specific strategy or investment team relevant to that investment fund. Not all designated individuals will be considered Key Persons for every investment fund, but rather for the relevant strategy.
What happens if one of those individuals steps away from the investment fund? That’s where the concept of a “Key Person Event” comes in, a trigger mechanism designed to protect LPs when the people in whom they placed their confidence are no longer actively managing the investment fund and, therefore, their capital. These clauses are intended to address the risk that one or more of the Key Persons, on whom investors rely to generate a meaningful IRR, might become unavailable or disengaged during the investment fund’s life.
2. The “Key Person Event” - Trigger Mechanics
A Key Person Event is the trigger mechanism designed to protect investors when the individuals identified as critical to the investment fund’s operations are no longer actively managing the investment fund. While the concept is straightforward, the mechanics can vary significantly across LPAs.
In most cases, a Key Person Event is triggered when one or more designated individuals cease to meet a defined level of involvement, whether due to departure, incapacity, or insufficient time commitment.
Some LPAs often set clear thresholds for example, requiring a Key Person to devote at least 80% of their business time to the affairs of the investment fund, while others rely on more flexible language that is intentionally vague such as “substantially all of their business time,” which, offers greater flexibility for GPs but less certainty for LPs.
Ultimately, the level of precision will depend on the negotiation dynamics between the GP and the LPs.
Key Person clauses can also differ in structure:
· Tied clauses: A single departure or unavailability triggers a Key Person Event—common in investment funds with a small founding team or focused strategy.
· Threshold clauses: The clause is only triggered when a defined number (e.g., two out of four) of Key Persons depart or are no longer actively involved - typical for larger firms.
· Multitiered clauses: Used by larger fund managers, where Tier 1 includes senior principals (any departure or unavailability may trigger an event), and Tier 2 includes mid-level or junior professionals, with events triggered by cumulative departures or unavailability (e.g., four out of eight). This clause combines elements of both individual and cumulative triggers across different seniority levels.
3. Key Person Event Occurs - What Happens Next?
So, the trigger has been pulled: one or more Key Persons have stepped away, and a Key Person event has officially occurred. What happens next?
As always in investment fund governance, the answer depends on what was negotiated upfront. The LPA typically sets out a combination of automatic consequences, discretionary measures, and actions requiring LP or LPAC consent. These mechanisms are designed to protect investors while allowing the GP time to restore stability and continuity.
Here is a brief overview of what may follow:
· Automatic suspension of the investment period or capital calls, pending cure of the KeyPerson Event. This is the most common immediate consequence. In most LPAs, once a Key Person Event is triggered, the investment fund may only continue to make investments with LPAC approval or for follow-ons and reserved matters. In some cases, the suspension itself may also require LP or LPAC confirmation.
· A requirement for LP or LPAC consent to resume investment activity. In many market-standard LPAs, the GP is given a window, usually 90 to 180 days, to propose a solution (e.g., by appointing a replacement Key Person or re-organising the team), subject to LPAC or LP supermajority consent to lift the suspension.
· Discretionary measures, such as the appointment of a replacement Key Person, internal restructuring, or formally nominating a new Key Person, may be proposed by the GP within the resolution window;
· Escalation options for LPs if the matter remains unresolved, include (1) Permanent termination of the investment period if no resolution is reached, (2) Removal of the GP (for cause or under no-fault provisions), (3) Restrictions on launching successor funds without LP consent (4) lower management fee etc.
Each of these outcomes will depend on the specific drafting of the clauses and the negotiating power of the parties at the time the investment fund was raised.
As a side note, in ADGM and DIFC, the departure of a Key Person who is also an Approved Person (e.g., the Senior Executive Officer or Licensed Director) would necessitate formal notification to the FSRA or DFSA and could require regulatory approval for a replacement. Therefore, for investment funds domiciled or managed in these jurisdictions, Key Person clauses often operate alongside internal compliance and regulatory obligations, and GPs should ensure that changes in key personnel are not only disclosed to LPs but also properly handled with the local regulator to avoid supervisory concerns.
4. Negotiation Dynamics
Key Person clauses are rarely boilerplate. They are often the focus of tough negotiations, reflecting the natural tension between GPs and LPs. While both sides may agree on keeping the list of Key Persons relatively short to focus on those truly critical to the strategy, their motivations differ. GPs seek flexibility and may push for higher thresholds or softer definitions of involvement to avoid unnecessary disruption. LPs, on the other hand, want clear triggers and lower thresholds to ensure they can respond quickly to changes in leadership. To resume GPs want flexibility and LPs seek control.
The back and forth usually revolves around how many people are designated as Key Persons and what exactly triggers an event. Should one person leaving be enough? Or should it only be triggered if, say, two out of four steps away? GPs often ask for carve-outs too (i.e. exceptions to what counts as a Key Person Event) temporary absences due to holidays, medical leave, sabbaticals, or internal role transitions, arguing that these should not trigger a suspension of investment activity. LPs, for their part, typically scrutinise these carve-outs closely to ensure they are not overly broad and that material disengagement cannot be easily disguised as routine absence.
The LPAC typically plays a central role and steps in to monitor compliance with the Key Person Clause and give approvals when needed. Whether it’s waiving a breach or confirming that a replacement Key Person is acceptable, the LPAC becomes the referee. At the end of the day, these negotiations are all about finding a balance between governance protection and operational breathing room.
5. Final thoughts
Key Person provisions may seem technical, but they sit at the heart of what private funds are built on: trust in people. While no clause can prevent unexpected departures, a well-thought Key Person framework ensures that both GPs and LPs are aligned, with clear expectations, defined processes, and room to respond when the unexpected happens. As private capital continues to grow and teams become more complex, these provisions will remain a cornerstone of investor protection and investment fund governance.
For further insights into investment fund structures and governance, please contact the Private Funds team at lecocqassociate.(info@lecocqassociate.com )
