A key man clause (or key person) is a provision in a private equity fund’s limited partnership agreement that ties the fund’s ability to make new investments to the ongoing involvement of specific senior managers. These named individuals – often founding partners or deal leads – are viewed by investors as critical to the fund’s strategy and execution. If they resign, become incapacitated, or materially reduce their time commitment, the clause is triggered.
Typically, this results in a suspension of investment activity until limited partners decide whether to reinstate authority or move to alternative remedies. Unlike broad removal-for-cause rights, the key man clause narrowly governs capital deployment and, in some cases, management fees, making it one of the most important investor protections in fund governance.
Variants in documents include “key person,” “key individual,” and “key executive.” In multi-vehicle platforms the clause is fund-specific. Cross-fund linkages sometimes appear in separately managed accounts or parallel funds. It sits alongside for-cause and no-fault removal provisions, which address governance and economics at the GP entity level rather than day-to-day investment activity.
Limited partners want a direct lever over deployment when a fund’s strategy relies on specific people. They favor automatic investment pauses, clear cure paths, and fee adjustments while the pause is in effect. They usually press for conservative time tests and LPAC consent on replacements.
General partners want operating flexibility. They prefer broad follow-on carveouts, longer cure periods, the ability to propose replacements with LPAC ratification, and minimal fee reductions. They also want the clause to be vehicle-specific so it does not spread across strategies.
Lenders to subscription credit facilities prefer the clause to match the LPA. A continuing key person event can affect borrowing availability and covenants. Lenders seek notice and sometimes a drawstop while the event continues. Secondary buyers and continuation fund counterparties will diligence whether a key person event exists or is likely.
Key person clauses are standard in Delaware limited partnerships and limited liability companies that house most US funds. The Delaware statute allows the LPA to define and limit GP powers, so the clause can bind the GP’s authority to call and deploy capital. Other domiciles such as Cayman exempted limited partnerships, Luxembourg SCSp structures, and UK limited partnerships use similar constructs. Under EU regimes like AIFMD, managers must show strong governance and disclosure around material changes. AIFMD II adopted in 2024 raises reporting and delegation expectations for managers that operate in the EU.
Definitions are negotiated and specific. Three elements drive the clause.
First is who qualifies as a key person. Funds name individuals and sometimes group them by tier. Tiering lets parties set different trigger thresholds when senior and junior members change.
Second is continuity. Time commitment is usually stated as a percentage of business time devoted to the fund and related vehicles. Thresholds range from at least half of business time to substantially all. Some agreements exclude firm management time from the calculation.
Third is the trigger. Death, disability, departure from the firm, or a material time reduction below the threshold are common triggers. Some clauses also reference specified bad acts, but most focus on time and affiliation.
Triggers follow two patterns: Headcount tests cause an event if fewer than a set number of named people remain at the required commitment. Role-based tests cause an event on the loss of any one senior key person, sometimes combined with a second loss among the rest. The effective period matters. Many clauses apply only during the investment period. Some continue during harvesting with narrower effects, such as a bar on new investments while permitting dispositions and ordinary-course follow-ons.
Market practice seeks balance. A cure period of 90 to 180 days is common. The clock can start on occurrence or on GP notice to LPs or the LPAC. Replacements proposed by the GP usually require LPAC consent. Some agreements require approval by a supermajority of LP interests when the original group was small or unusual. During the cure period investment activity is normally paused other than permitted follow-ons. GPs are expected to notify LPs and lenders promptly, describe replacement qualifications, and update offering documents and Form ADV where needed.
Suspension freezes new platform commitments. Agreements should spell out what the fund can and cannot pay during this period.
If the cure fails, agreements usually provide one or more outcomes.
A key person clause touches fees in three main ways. First is fee continuation during suspension. Some LPAs keep management fees at normal levels to pay the team and vendors. Others reduce fees or limit them to budgeted fund expenses. Many LPs favor a reduction if the event ends the investment period. Second is carry timing and threshold effects. A smaller deal set can change how and when carried interest crystallizes. The mechanics of the distribution waterfall and the preferred return become more important when deployment is capped. Third is transaction costs and overhead. Recruiting replacements, extra LP communications, and incremental legal work will raise operating expenses. Agreements should state whether these are fund expenses or GP costs.
Illustration. A one billion dollar buyout fund charges a two percent fee on committed capital during a five year investment period. That is twenty million dollars per year. If deployment is paused for a year and the LPA cuts fees to one percent during suspension, the GP’s gross fee revenue drops by ten million dollars for that year. If LPs later vote to end the investment period, the fee base often shifts to net invested capital as realizations occur, which likely reduces revenue further. The GP must bridge the gap while managing assets and working through the cure.
For more background on fees and carry, you may want to read these detailed articles on private equity fee structure and carried interest.
At the fund level, a key person event does not change fair value measurement or consolidation. It can be a subsequent event that merits disclosure if it occurs after period end but before issuance. Under US GAAP ASC 855 and IAS 10, the fund should describe the event and estimate its financial effect if possible. At the adviser, management fees affected by a suspension can raise revenue recognition questions under ASC 606. A rate change tied to a contractual event can be a contract modification. Documentation of timing, fees earned, and any reductions or rebates will help auditors. If fee streams are pledged to a lender, a drop in expected cash flows can trigger impairment analysis of related intangibles.
US registered advisers should update Form ADV for material changes. A key executive’s departure or change in responsibilities is often material given risk factor disclosures and Item 9 of Part 2A. Brochure supplements for supervised persons should be updated when roles change. The SEC Marketing Rule bars misleading team claims. Statements about a stable or seasoned team require care after a key person event and should be corrected in marketing materials.
The SEC’s 2023 private fund adviser rulemaking was vacated by the Fifth Circuit on June 5, 2024. That decision removed pending deadlines but did not change existing obligations under the Advisers Act, including antifraud and marketing rules. Advisers should keep controls tight around disclosures and communications when a key person event occurs.
In the UK and EU, managers must maintain sound governance and disclose material changes. The FCA has emphasized operational resilience and people risk for alternative managers. AIFMD II raises expectations for reporting and delegation oversight. Managers should match notifications and investor communications to local requirements when key persons change.
A key person event does not change the fund’s tax classification. It can change the timing and mix of taxable allocations if deployment slows and realizations dominate. Adjustments to management fees or fee waivers add partnership tax questions. Changes to advisory arrangements can affect deductibility for portfolio companies if intercompany terms shift. Cross border funds should monitor withholding and treaty positions if a replacement key person changes where management and control is exercised or if activity in a jurisdiction rises enough to raise permanent establishment risk.
Subscription credit facilities often incorporate the key person concept in two ways. First, availability and defaults. Facilities may treat a continuing key person event as a borrowing base adjustment or a drawstop rather than an immediate event of default. Some lenders add an event of default if the event remains uncured after the LPA cure period or if LPs vote to end the investment period. Second, reporting. Borrowers should notify lenders promptly and update them on cure progress.
Borrowing bases may exclude uncalled commitments from LPs that reserve rights to suspend funding during a key person event. In continuation funds and GP led secondaries, buyers and fairness providers will require representations that no key person event is in effect at either the selling fund or the continuation vehicle. If an event exists, approvals and fee mechanics must be addressed in the documents.
The LPAC is central to administration. The committee reviews the GP’s notice, evaluates replacements, and handles interim approvals. Practices vary by fund. Some committees require a formal meeting and minutes. Others allow email votes with defined response times. Agreements should address conflicts for LPAC members that are co investors or lenders and state quorum and approval standards.
Alternatives include hard caps on GP authority for commitments above a threshold without LPAC consent. These caps focus on governance rather than people risk. Fee ratchets tied to deployment milestones tie economics to activity but do not pause deployment if the team changes. Corporate governance covenants at the GP or adviser entity can add oversight but are harder to negotiate in private equity. Key person insurance provides cash on death or disability but does not substitute for investment judgment.
LP bargaining power over terms changes with fundraising conditions. Global buyout fundraising totaled 517 billion dollars in 2023, down from 2022 according to Bain’s 2024 report. In slower markets, LPs push for tighter triggers, shorter cure periods, and fee reductions during suspension. GPs sometimes accept stricter key person terms in return for smoother closings or LPAC discretion on replacements. For a refresher on how deployment patterns affect the J curve, check out our article.
A key person clause converts a people risk into operating rules for deployment and fees. The clause works when definitions are clear, documents match, and communication is steady. In slower fundraising periods LPs push for automatic suspensions, tighter cure windows, and fee reductions. GPs that enter fundraising with a succession plan, carry reallocation rules, and lender terms that match the LPA will negotiate from a stronger position and reduce the chance of value loss when key personnel change.
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