Managing Key Person Risk

Managing Key Person Risk in Private Equity

Successful private equity investing is fundamentally driven by human capital. The expertise, judgement, and leadership of key individuals within the General Partner (GP) team are often central to a fund’s performance. Consequently, the unexpected loss or departure of one or more of these individuals—known as a “key person event”—can severely impact investor confidence and fund operations.

To mitigate this risk, Limited Partners (LPs) and fund managers typically adopt a combination of structural and operational strategies. Below are three commonly used approaches:

1. Key Person Provisions in the LPA

Many private equity funds include key person clauses within the Limited Partnership Agreement (LPA). These clauses outline what happens if a key individual is no longer actively involved in managing the fund—due to resignation, death, or disability.

Typical safeguards may include:

• Suspension of new investments until LPs vote to continue
• Restrictions on investor redemptions during a key person event
• Triggering of “lock-ups,” “gates,” or mandatory investor notice periods

2. Key Person Insurance

Some funds may take out key person insurance—a life or disability insurance policy that provides financial compensation in the event a critical individual becomes incapacitated or passes away.

Benefits of this insurance include:

• Offsetting financial loss to the fund
• Funding transitional management or restructuring needs
• Providing reassurance to LPs that a contingency plan is in place

3. Written Key Person Contingency Plans

Best practice requires that the GP prepare a formal key person contingency plan. This document outlines the course of action to be taken if a key individual is no longer available, including:

• Who will assume their responsibilities
• Steps for ensuring business continuity and operational oversight
• Communication protocols with LPs and stakeholders
• Potential fund dissolution procedures if necessary

In summary: The presence of key person protections—whether legal, financial, or operational—can significantly reduce risk exposure and increase the resilience of a private equity fund. For LPs, these strategies offer reassurance that the fund will remain stable and effective even in the face of unexpected leadership disruptions.