Key Person Provision
A key person provision is a limited partnership agreement term that suspends a fund's investment period when named individuals stop devoting their business time to the fund or lose control of the manager.
Reviewed by José Vasquéz, Managing Partner
"Key man clause" is the older name for the same term. The Institutional Limited Partners Association (ILPA) glossary describes the clause this way: if specified key executives cease to devote a specified amount of time to the partnership, the manager "is prohibited from making any further new investments (either automatically or if so determined by investors) until such a time that new replacement key executives are appointed" (ILPA Principles 3.0, glossary).
Mechanism
ILPA Principles 3.0 say key persons "should be the individuals that will determine the investment outcomes of the fund," not solely the founders.
The ILPA Model LPA term sheets, last updated July 2020, deem named individuals Key Persons and define a Key Person Event in two parts. First, during the Commitment Period the named persons cease to devote substantially all their business time and attention to the fund, its manager, any prior fund and parallel vehicles. Second, there is a Change of Control, meaning the Key Persons stop controlling the general partner and manager or together hold less than a bracketed 75 percent of the carried interest (whole-of-fund term sheet). The deal-by-deal term sheet repeats this text; the versions differ in waterfall and clawback.
On a Key Person Event the Commitment Period is automatically suspended. The same Model LPA row also suspends it on a notice approved by a bracketed percentage in interest, with no event at all; Principles 3.0 would set that no-fault threshold at a simple majority. Drawdowns then need Advisory Committee consent, except for Fund Expenses, investments that legally bind the fund and earlier liabilities.
Under the Model LPA the suspension lasts until a Majority in Interest approves a remediation plan in writing or waives the suspension; if neither happens within a bracketed 90 days, the Commitment Period terminates.
ILPA Principles 3.0 differ on the vote: the suspension should become permanent unless a defined super majority of limited partners affirmatively votes to reinstate, excluding general partner and affiliate interests. The Principles give the window as 180 days in the Key Person section (page 19) and as 90 days in the fund governance table (page 23). They add that during the suspension the general partner should not use recycled capital or borrowing against fund assets or uncalled commitments to make new investments unless the agreement permits it, and that an interim clawback test should be performed.
Relation to Removal
Removal ends the general partner's role. For cause, the Model LPA lists "Removal Conduct," including fraud, bad faith, gross negligence and criminal conduct; in the term sheet's bracketed form, once a court has confirmed the conduct, a Majority in Interest may terminate the fund or remove the general partner, and the removed general partner receives no further carried interest. Without cause, at least 75 percent in interest may remove the general partner or terminate the fund at any time, and the general partner keeps distributions on earlier investments, subject to a bracketed reduction.
Principles 3.0 would allow removal for bad acts on a preliminary determination rather than a final court decision, a simple majority in interest to remove for cause and two-thirds in interest to remove without cause, and state that dismissing the responsible individual is not an automatic cure.
Worked Example
Consider a hypothetical $100 million fund whose unaffiliated limited partners hold $100 million of interests, with $60 million called, and assume the departure of two of three Key Persons is a Key Person Event. Uncalled capital is $100 million − $60 million = $40 million. If $6 million of investments are legally bound and $3 million of pre-suspension liabilities are due, permitted calls total $9 million, and $40 million − $9 million = $31 million stays uncallable for new investments unless the suspension ends.
| Vote | Threshold | Interests required |
|---|---|---|
| Model LPA cure or waiver (Majority in Interest, read as over 50 percent) | Simple majority | More than $50.00 million |
| Principles 3.0 super majority (defined as two-thirds): reinstatement, no-fault removal | Two-thirds | $66.67 million |
| Model LPA removal without cause | 75 percent | $75.00 million |
ILPA's 2021 report, drawing on Colmore data for 153 funds, its whole sample for non-fee terms, found that 96 percent of funds require suspension on a key person event, and a vote of 50 percent of limited partner interests was the most common cure, at 40 percent of funds (What's Market in Fund Terms?).
What It Means for a Limited Partner
Principles 3.0 say any significant team change should let limited partners reconsider their commitment, and that they be notified immediately when the provision is tripped.
Four drafting points matter. Scope: the provision should not be drafted so that departures of people reasonably believed to be key would not trigger it. Time: in a sample of 150 partnership agreements the most common trigger, at 60 percent, was failing to devote substantial time to fund activities (ILPA, 2021, citing Colmore data). Vote: the threshold and the exclusion of general partner interests decide whether reinstatement is real. Duration: Principles 3.0 ask how the provision works after the investment period, possibly the most critical time for continuity. The same report says key person is no substitute for strong fiduciary duties.
In Life Sciences and Healthcare
Where outcomes turn on clinical and regulatory judgment, the Principles 3.0 test of who determines investment outcomes matters more than titles. BIO, Informa Pharma Intelligence and QLS Advisors report an average of 10.5 years for a Phase I asset to reach approval, and a 7.9 percent likelihood of approval from Phase I (BIO, 2011-2020). A position can therefore outlast the investment period, and the Model LPA time-and-attention trigger applies only during the Commitment Period, so a later departure does not suspend anything under that limb.
Governing Authority and Sources
- ILPA Principles 3.0 (June 2019), "Key Person" and glossary; still the edition on ILPA's Principles page as of October 10, 2026.
- ILPA Model LPA term sheets, whole-of-fund and deal-by-deal versions (last updated July 2020).
- ILPA, What's Market in Fund Terms? (2021), with Colmore and K&L Gates content.
- BIO, Informa Pharma Intelligence and QLS Advisors, Clinical Development Success Rates 2011-2020.
Frequently Asked Questions
What is a key man clause?
A key man clause is the older name for a key person provision, a fund term that stops new investing when named individuals leave or cut their time. ILPA defines it as barring new investments, automatically or by investor decision, until replacement key executives are appointed.
What happens when a key person event occurs?
The investment period is suspended, and the fund may draw capital only for expenses, binding commitments and earlier liabilities. Under the ILPA Model LPA, a majority in interest may approve a remediation plan or waive the suspension. ILPA Principles 3.0 would make the suspension permanent, after 180 days in one section and 90 days in another, without a super majority vote to reinstate.
What is a GP commitment, and is it part of a key person provision?
No. The general partner commitment is the capital a general partner contributes alongside limited partners, and ILPA calls it a critical aspect of alignment of interest. Principles 3.0 say it should be paid in cash rather than through management fee waivers. A key person provision governs team continuity instead.
Related Reference
This entry belongs to the growth equity thesis. Related entries: Carried Interest, Emerging Manager and Special Purpose Vehicle.