The no-fault divorce clause read as numbers: the vote, the fee tail, the carry the removed GP keeps, and what the replacement manager will want on top.
A no-fault removal costs the LPs the fee compensation the LPA pays the outgoing GP plus any carried interest paid twice on the same portfolio. On an illustrative $600m fund, with 12 months of fees and the removed GP keeping 60 per cent of its carry, the cost is $12.0m, or 2.00 per cent of commitments, if the replacement manager is paid from the forfeited 40 per cent, and $57.36m, or 9.56 per cent, if the replacement also takes a full 20 per cent on the existing portfolio.
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 →
A no-fault, or "no cause", removal lets the LPs replace the GP without proving misconduct. Because the GP has done nothing wrong, the LPA compensates it. The clause has three parts, and each one is a number to read:
Removal for cause usually carries none of this: no fee tail and the carry forfeited, in whole or in large part. The gap between the two is what the LPs pay for not having to prove anything.
| Item | Value |
|---|---|
| Commitments | 600 |
| Existing portfolio at cost | 420 |
| Expected exit multiple on that portfolio | 1.9x |
| Carried interest, after the hurdle and a full catch-up | 20% |
| Share of carry on existing investments kept by the removed GP | 60% |
| Fee compensation: months of a 2% fee on commitments | 12 |
| Removal vote, share of LP commitments | 75% |
| GP commitment and affiliated LPs, excluded from the vote | 12 + 6 |
The fund is well past its hurdle, so carry is simply 20 per cent of profit. Management fees on the rest of the fund's life are ignored: the replacement charges a fee as the old GP would have.
Step 1, carry on the existing portfolio. 420 × 1.9 = 798 of value, 378 of profit, 20% × 378 = 75.6 of carry.
Step 2, split it. The removed GP keeps 60% × 75.6 = 45.36; 30.24 is forfeited.
Step 3, fee compensation. 2% × 600 × 12 / 12 = 12.
Step 4, what the replacement is paid. This is the term the LPA does not settle, because the replacement is not yet a party. Two outcomes bracket it.
Replacement paid from the forfeited 30.24: total carry on the portfolio 45.36 + 30.24 = 75.6, unchanged. Cost = 12, or 2.00% of commitments
Replacement takes a full 20% on the portfolio: 45.36 + 75.6 = 120.96. Extra carry 45.36. Cost = 12 + 45.36 = 57.36, or 9.56%
Excel: =Commit*Fee*Months/12+Carry*Retained*(ReplacementTakesFull)
On the existing portfolio alone, LP proceeds fall from 722.40 to 677.04 in the second case, and the net multiple on that capital from 1.720x to 1.612x. The removal paid for itself only if the replacement adds more than that, by exiting better or faster than the GP it replaced would have.
| Removed GP keeps | Kept | Total if replacement is paid from forfeited carry | Total if replacement takes a full 20% | Extra paid by LPs |
|---|---|---|---|---|
| 0% (closer to for cause) | 0.00 | 75.60 | 75.60 | 0.00 |
| 50% | 37.80 | 75.60 | 113.40 | 37.80 |
| 60% | 45.36 | 75.60 | 120.96 | 45.36 |
| 75% | 56.70 | 75.60 | 132.30 | 56.70 |
| 100% | 75.60 | 75.60 | 151.20 | 75.60 |
The extra cost is exactly the carry the removed GP keeps, because a replacement on full terms is paid on top of it. A clause letting the GP keep 100 per cent does not cost the LPs anything only if a replacement will work the existing portfolio for nothing, which none will. Read the retained share as the price of a replacement's incentive.
Voting base = 600 − 12 − 6 = 582
Votes needed = 75% × 582 = 436.5
Blocking position = more than 582 − 436.5 = 145.5
An LP with a 160 commitment holds 27.5 per cent of the voting base and can block removal on its own. If the clause failed to exclude the GP and its affiliates, 450 would be needed and the GP's own 18 would count against removal. Anyone reading the clause should identify the blocking holders on the register before relying on it; a removal right that one investor can veto is a negotiating position, not a remedy.
Treating the fee tail as the cost of removal. The 12 is visible in the clause; the 45.36 is not, because it depends on terms negotiated with a manager who does not yet exist. Any LP weighing a no-fault removal should price the replacement's carry on the existing portfolio first. The same arithmetic applied to a real estate joint venture is set out in what it costs to remove a JV sponsor, and carry already paid that may have to come back in what a clawback actually collateralises. The fee and waterfall model for your own fund is among the free workbooks for the book.
Price a no-fault removal as fee compensation plus double carry. On the worked fund that is 12 at best and 57.36 at worst, 2.00 to 9.56 per cent of commitments, and the difference is set entirely by what the replacement manager is paid on a portfolio it did not build.
A provision letting a supermajority of LPs, often two-thirds to three-quarters of commitments excluding the GP and affiliates, remove the GP without cause. The GP is compensated, typically with fees for a period and carry on existing investments. In the worked case that is 12 of fees and 45.36 of the 75.6 carry on the portfolio held at removal.
On a no-fault removal it usually keeps carry on investments made before removal, often reduced by a set percentage, and none on later ones. For cause it typically forfeits most or all of it. A GP keeping 60 per cent of a 75.6 carry retains 45.36, which becomes an extra cost to LPs if the replacement manager is also paid a full 20 per cent.
Whatever the LPA sets, applied to the voting base it defines. With 600 of commitments, 18 held by the GP and affiliates excluded and a 75 per cent threshold, removal needs 436.5, and any holder with more than 145.5 can block it alone: an LP with 160 holds 27.5 per cent of the vote.
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.
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