A very important aspect of LPs’ due diligence before deciding
to commit to a fund is determining the investment skill of the people managing/advising the fund. During the long life of a fund it is possible that some of the key members of the team may leave. If this happens it may result in a material change to how LPs regard the quality of the team managing/advising the fund.
The fund documents should identify the key individuals in the GP responsible for the day-to-day management of the fund. They are likely to be the most experienced people who are key to managing that specific fund.
Key Persons are expected to devote substantially all their business time to the fund. It would be normal that this includes provision for spending appropriate time with predecessor funds and, in due course, with successor funds. If it is agreed between the GP and LPs that a senior member of the GP is included in the Key Person provisions, who is perhaps not so directly involved in the day-to-day management of that particular fund, then a lesser time allocation is usually agreed.
The consequences and procedures for dealing with the situation when a Key Person ceases to devote the necessary time to a fund (the triggering of the Key Person provisions) should be clearly set out in the fund documents.
Usually the triggering of Key Person provisions causes a temporary suspension of the investment period. The procedures for what happens next should enable the situation to be resolved promptly. The GP will normally tell all LPs promptly when the Key Person provisions have been triggered and set out the plan to address the situation. LPs should engage promptly with the GP to achieve a timely resolution. It is common to include provisions to enable a Key Person to be replaced and so avoid the Key Person provisions being triggered, or to resolve the situation if the Key Person provisions have been triggered.
It is normal to require a majority vote of all LPs or a decision of the LPAC to agree to any Key Person replacements, or to lift the suspension of an investment period. It is important for the good governance of the fund that LPs participate when a vote is required.