A key person clause is a protective provision in the LPA that ties the fund’s ability to make new investments to the continued involvement of specific named individuals. If those individuals depart, become incapacitated, or fail to devote a specified minimum level of time to the fund, a “key person event” is triggered. The typical consequence is an automatic suspension of the fund’s investment period, meaning the GP cannot make new investments until the situation is resolved by the LP advisory committee (LPAC) or a vote of the LPs.
The rationale behind the key person clause is straightforward: LPs invest in people, not just strategies. When an LP commits $25M to an emerging manager’s debut fund, they are underwriting the judgment, relationships, and track record of specific individuals. If those individuals leave, the investment thesis that justified the commitment may no longer hold. The key person clause gives LPs a structured mechanism to pause investment activity and evaluate whether the remaining team can execute the fund’s strategy. Without this provision, a GP could continue deploying LP capital even after the core investment team has departed.
The mechanics of a key person clause involve several defined elements. First, the named key persons, typically the fund’s founder, managing partners, or senior investment professionals. Second, the trigger conditions, which usually include death, disability, departure from the firm, or failure to devote a minimum percentage of professional time to the fund (commonly 50% to 75%). Third, the consequences, which range from automatic investment period suspension to requiring an LPAC vote to continue operations. Fourth, the cure provisions, which define how and whether the GP can resolve the key person event, often by appointing a replacement that the LPAC or LP majority approves.
For emerging managers raising capital, the key person clause requires careful thought during fund formation. In a two-partner firm, both founders are almost certainly key persons, and the departure of either one would trigger the clause. This is entirely reasonable from the LP’s perspective. The negotiation usually centers on the specific trigger conditions and cure mechanisms. GPs typically push for a cure period (30 to 90 days to find a resolution before the suspension takes effect), a time dedication threshold that allows for reasonable outside activities, and the ability to propose a replacement key person for LPAC approval rather than requiring a full LP vote.
The key person clause also interacts with other fund terms. If a key person event triggers an investment period suspension and the GP cannot resolve it, the management fee may step down or the investment period may terminate entirely. In some structures, a prolonged key person event can give LPs the right to wind down the fund. The GP commitment provisions may also address what happens to the key person’s personal investment in the fund upon departure. These interconnections make the key person clause one of the provisions where experienced fund formation counsel adds the most value, ensuring that the various LPA sections work together consistently.
Frequently Asked Questions
What happens when a key person event is triggered?
When a key person event is triggered, the fund's investment period is typically suspended. The GP cannot make new investments (though it can usually fund follow-on investments and pay expenses). The suspension continues until the LPAC or a majority of LPs vote to reinstate the investment period, which may involve approving a replacement key person. If no resolution is reached within a defined timeframe (often 6 to 12 months), the investment period may terminate permanently.
Who qualifies as a key person?
Key persons are typically the fund's senior investment professionals whose involvement was a primary reason LPs committed capital. For emerging managers, this is usually the founder or founding partners. For larger firms, it may include the CIO, managing partners, or sector heads. The specific individuals are named in the LPA and often referenced in the fund's marketing materials and PPM.
Can a GP negotiate to limit the scope of the key person clause?
Yes, and most do. Common negotiations include defining 'departure' to require full-time departure (not just reduced involvement), setting the time dedication threshold (e.g., the key person must devote at least 50 to 75% of their business time to the fund), allowing a cure period before the suspension takes effect, and limiting the clause to the investment period only rather than the full fund life.
