Don’t let key-person provisions take you by surprise

The loss or resignation of a founder or co-founder of a general partner can significantly rock the boat, sending ripple effects throughout the firm while causing investors and limited partners to reconsider their relationship. These departures can especially cause concern when they trigger a key-person provision clause that may require a halt in new investments. 

This was the case when a Chicago-based middle market private equity firm’s co-founder suddenly resigned after pleading guilty to domestic abuse charges in Southern California in August of 2024. A search of the county court records where the individual lives found that he was charged with an unspecified crime in March of 2024, and a document filed with the SEC earlier this year confirmed the filing and disclosed the nature of the charges.

These charges and resulting criminal case brought the co-founder’s character under scrutiny. He alleged that the events in question were due to a change in his prescription medicines, leading him to become, “a person “unrecognizable” to close friends and family, culminating in “a reckless incident” involving his wife,” according to his letter to his colleagues obtained by mainstream media sources. 

Following these incidents, he was charged with felony injury as well as a misdemeanor for violating a protective order. He pleaded guilty in July and was sentenced to three years probation, one year of GPS monitoring and a 52-week domestic violence program, according to law enforcement sources. He also faces a protective order prohibiting him from contacting his wife and child. Hot on the heels of his charges, the firm sent a letter to investors claiming he had stepped down to focus on personal matters. 

“We are now working expeditiously through the details of his departure from the firm,” they said in a separate written statement to the Wall Street Journal, adding, “it remained focused on generating value for its investors.”

The firm’s limited partnership agreements had a key-person provision clause in place that prevented the firm from drawing down investment funds or making new investments if certain individuals were to leave or be incapacitated. These provisions are generally put in place to give limited partnerships a way to limit their liability in case a general partner’s owner or investment officer leaves the firm or is incapable or unwilling to continue. In this specific case, ongoing monitoring of key persons could have identified the regulatory disclosure and filing of the lawsuit in near real time, giving the LPs in this situation forewarning that the individual in question may have to leave the firm. Prior knowledge of this possibility could have led to a smoother transition and may even have avoided the need to halt investments. Are you vetting key persons in your LP-GP relationship? Schedule a demo with Intelligo today to monitor executives of the partners you do business with.