The key person clause rarely forfeits anything outright; it changes the fee base, and the cost depends on when it bites and whether it is cured.
A key person event costs the GP whatever the LPA moves off the fee base, and the large cost comes only if the event is not cured and the investment period ends. On an illustrative $600m fund charging 2.0 per cent on commitments for five years and 1.5 per cent on net invested capital after that, an uncured event at the end of year 2 costs the GP $37.3m of management fees, 62.2 per cent of the fees it still had to earn. Cured within a six-month suspension, it costs $4.2m.
Worked in full in How to Read a Limited Partnership Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The key person clause names the people LPs are backing and sets a trigger: a stated number of them ceasing to devote substantially all, or a required share, of their business time to the fund. When it is triggered, a typical LPA does three things:
Some LPAs also switch the fee during the suspension itself. Nothing is forfeited outright; the cost is the fee base that disappears and the capital never invested.
| Input | Value |
|---|---|
| Commitments | 600 |
| Fee during the investment period, on commitments | 2.0% |
| Fee after it, on net invested capital | 1.5% |
| Investment period, years | 5 |
| Capital invested by the end of years 1 to 5 | 120, 240, 360, 450, 540 |
| Net invested capital in years 6 to 10 | 540, 450, 330, 200, 80 |
| Key person event, end of year | 2 |
| Suspension before termination, years | 0.5 |
| Follow-ons after termination, share of capital invested at the event | 1/12 |
Base fees from the event = 2.0% × commitments × years of investment period left + 1.5% × sum of net invested capital in years 6 to 10
Terminated fees = 1.5% × invested capital at the start of each year, from the event to year 10, on the smaller portfolio
Cost to the GP = base fees − terminated fees
Excel, years in columns: =SUMPRODUCT(Rate_row, Base_row) for each case, then the difference
| Period | No event | Investment period terminated |
|---|---|---|
| Year 3 (2.0% on 600, or 1.5% on 240) | 12.0 | 3.60 |
| Year 4 (or 1.5% on 246.7) | 12.0 | 3.70 |
| Year 5 (or 1.5% on 253.3) | 12.0 | 3.80 |
| Years 6 to 10 (1.5% on net invested) | 24.0 | 11.56 |
| Total | 60.0 | 22.7 |
With the investment period gone, the portfolio stops at 240 of capital plus follow-ons, 260 by year 5, instead of growing to 540. The fee falls on two counts: the rate and base switch three years early, and the post-investment-period base is less than half its planned size.
An uncured event at the end of year 2 costs the GP $37.3m of undiscounted fees, 62.2 per cent of the fees remaining and 6.2 per cent of commitments. If the 280 never invested would have earned an illustrative 1.8x gross, the carry forgone on it at 20 per cent is a further $44.8m, before any hurdle. The economic cost is larger than the fee line, which is why GPs fight hard to cure.
A cure is cheap by comparison. If the LPA charges the post-investment-period fee during the suspension, six months cost the GP $6.0m of fees on commitments replaced by $1.8m on invested capital: $4.2m. If the LPA keeps the full fee running, the suspension costs nothing in fees at all, and the only protection the LPs have bought is the pause.
| Event at end of year | Invested at event | Fees with no event | Fees if terminated | Cost if not cured | Cost if cured |
|---|---|---|---|---|---|
| 1 | 120 | 72.0 | 13.2 | 58.8 | 5.1 |
| 2 | 240 | 60.0 | 22.7 | 37.3 | 4.2 |
| 3 | 360 | 48.0 | 28.4 | 19.6 | 3.3 |
| 4 | 450 | 36.0 | 28.4 | 7.6 | 2.6 |
The clause has most force early, when most commitments are uninvested. The two run in opposite directions: the probability of a key person event accumulates over the investment period, while its cost to the GP falls as capital is deployed, so a late departure is likelier but far cheaper than an early one.
Reading the key person clause as a trigger and stopping there. The cost sits in three other places: what the fee is during the suspension, whether termination switches the fee to invested capital or leaves it on commitments, and the voting threshold for reinstatement. An LPA where the fee runs in full through the suspension and the investment period can be reinstated by a simple majority in interest gives the GP a cost of close to zero, whatever the trigger says. LPs negotiating the clause should price these terms, not the list of names.
Termination also ends the GP's right to call capital for new deals, so the LPs' unfunded commitments fall. For an LP that has over-committed in anticipation of calls, that is a pacing problem as much as a protection.
The fee, carry and governance clauses are read side by side in the book, and the free workbook for this case sets out the fund's economics.
Under most LPAs the investment period is suspended automatically: no new investments, only follow-ons and commitments already made. LPs then vote, typically by a majority or supermajority in interest, to approve a replacement and reinstate it; if they do not within a set period, often 180 days, the investment period ends. On an illustrative $600m fund that changes the fee base from 600 of commitments to 240 of invested capital.
Only if the LPA says so. Many LPAs keep the full fee during the suspension; better LP terms charge the post-investment-period fee on invested capital instead. On a $600m fund with 240 invested, six months of suspension then costs the GP $4.2m: $1.8m of fees instead of $6.0m.
Early. An uncured event at the end of year 1 costs the GP $58.8m of fees on the illustrative $600m fund, against $7.6m at the end of year 4, because the uninvested commitments that stop earning fees and future carry are largest at the start.
This article is one calculation from How to Read a Limited Partnership Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 1501 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.