Key person provisions are a cornerstone of private equity fund governance. They serve as a contractual safeguard for investors, ensuring that the individuals most critical to a fund’s strategy and performance remain actively involved. But as the industry matures and leadership transitions become more common, these provisions are increasingly intertwined with broader succession planning efforts, raising operational, reputational, and compliance considerations that fund managers must proactively address.
What Are Key Person Provisions?
Key person provisions (also called “key man clauses”) are typically embedded in a fund’s limited partnership agreement (LPA). They identify one or more individuals whose continued involvement is deemed essential to the fund’s success. If a key person departs, becomes incapacitated, or is otherwise unavailable, the provision may trigger a suspension of investment activity until LPs approve a path forward.
These clauses are designed to protect LPs from the risk of investing in a fund whose leadership or strategy materially changes post-commitment. They are most common in early-stage funds, emerging managers, or funds with concentrated leadership structures.
Why Succession Planning Matters More Than Ever
While key person provisions are reactive by design, succession planning is proactive. It’s the process by which firms identify, groom, and transition leadership talent to ensure continuity across investment, operational, and strategic functions.
In today’s environment, marked by generational shifts, firm growth, and increasing institutionalization, succession planning is no longer optional. LPs are asking tougher questions about bench strength, leadership development, and long-term firm viability. And regulators are paying closer attention to governance structures that support resilience and continuity.
Operational Implications for Fund Managers
Effective succession planning requires more than naming a successor. It involves:
Documenting roles and responsibilities of key individuals across fund entities (e.g., GP, management company, advisory committees).
Clarifying ownership structures, especially when key persons are also equity holders in the management company or affiliated entities.
Aligning fund economics to support leadership transitions, including carried interest allocations and management fee splits.
Updating fund documentation to reflect changes in leadership or key person designations, often requiring LP consent or amendment processes.
Fund administrators play a critical role in supporting these transitions, tracking entity-level changes, updating signatories, and ensuring compliance with fund agreements.
Investor and Compliance Considerations
From an LP perspective, key person events can signal risk. Managers should be prepared to:
Communicate proactively with LPs about leadership changes and succession plans.
Demonstrate continuity in investment strategy, team capabilities, and operational execution.
Provide transparency around governance structures and decision-making authority.
Compliance teams must also monitor key person provisions as part of broader fund oversight, ensuring that any triggering events are documented, reported, and resolved in accordance with fund terms.