How to Read Key-Person Clauses in an AIF
Understanding the Manager Decision
A key-person clause names the specific individuals whose continued, active involvement the fund's strategy depends on, and defines what happens if any of them stop devoting the required time. Reading it carefully is one of the highest-value five minutes an investor can spend before committing capital.
Reading Evidence and Attribution
Check three specific mechanics: the trigger (which named individuals, and what threshold of reduced involvement counts), the suspension (does new investment activity pause automatically, or does the manager decide), and the cure or vote process (how long the manager has to address it, and what investors can do if they don't).
Where Manager Diligence Breaks
The common failure is confirming a key-person clause exists without reading its actual mechanics. A clause that merely requires the manager to 'notify' investors of a departure, with no automatic suspension or investor vote right, provides far weaker protection than one that does.
Making the Selection Decision
Before committing, confirm: exactly which individuals are named; whether departure triggers automatic suspension of new investments or merely a notification; the length of any cure period; and whether investors hold a genuine vote right on continuation, replacement, or wind-down.
A key-person clause is only as strong as its actual trigger and remedy mechanics — never assume strength from the clause's mere existence.
Key takeaways
- A key-person clause names specific individuals and defines what happens if they stop being actively involved.
- Check the trigger, the suspension mechanic, and the cure or investor-vote process — all three matter.
- A clause requiring only 'notification' is far weaker than one with automatic suspension and vote rights.
- Never assume protection from a clause's mere existence — read its actual mechanics before committing.
More in Fund Manager Selection and Due Diligence
Continue with the other chapters in this module.
Related questions
What should an investor verify first?
Exactly which named individuals trigger the clause, and what threshold of reduced involvement counts.
Which documents matter most?
The Private Placement Memorandum's specific key-person clause language.
What is the main downside to test?
A clause that only requires notification, with no automatic suspension or investor vote right.
How should the final decision be made?
Confirm investors hold a genuine vote right on continuation, replacement, or wind-down after a trigger.
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