Death of the Solo Fund Manager

What happens when a fund manager dies prior to the end of a fund's life? Should LPs diligence a manager's health history before committing money?

At the beginning of this year, I portended that 2025 would be the year of the key person.

I am not sure that was a good prediction. But it was vague enough for me to get away with being wrong.

I just made the prediction because everyone else was offering up their forecasting, and I momentarily wanted to fit in with the big boys and look legit.

Relatedly, I do think it is high time to reevaluate the relationality of a fund manager’s health to the risk of the fund’s capital in a limited partnership agreement (LPA).

Especially if there is only one person running a fund.

To recap, a key person clause is a protective mechanism hardwired into an investment fund’s governing documents defining certain investment professionals considered vital to the successful operations of the fund. These key persons are sometimes just one key person. Moreover, limited partners (“LPs”) often find themselves considering a fund because of a key person: their track record, professional pedigree, criminal history, etc.

Key person provisions protect LPs by giving them rights if individuals critical to a fund’s success depart or face major events.

Newer funds may name 1-2 Key Persons, while larger firms with multiple strategies often designate 5-6.

A key person event typically includes death, disability, termination, or a failure to devote “substantially all” business time to the fund—a vague but important concept that expects good faith dedication without requiring exclusive focus.

Following a key person event, the GP must notify LPs, triggering a suspension of the investment period for 90-180 days. LPs (or sometimes the LPAC) vote on whether to resume investing.

During suspension, the fund can manage existing assets but cannot make new investments beyond add-ons. In larger firms, multi-tiered key person structures are common, where departures of senior principals or significant portions of the investment team both trigger suspensions. While this reassures LPs, it can give junior team members leverage to renegotiate economics. Over time, it also supports succession planning by elevating future leaders in the eyes of LPs.

One Person Shops

Let’s assume a key person event (the death of the only private equity investment professional running the fund) has occurred.

What in the world happens to the portfolio holdings if the LPs are scrambling to find a replacement (assuming the LPA says they can)?

That replacement figure could never be a perfect substitute. It’s like diligencing a new fund all over again.

I wonder if the key person problem could be framed as the “existential” element of operational due diligence in the world of capital raising.

LPs aren’t versed in the actuarial sciences, but what if they applied the predictive analytics of life insurance to the likelihood of a solo manager’s death, disability or incapacitation?

Maybe there are data companies that already do this. But I wonder!

In this sense, I’ve always found it strange that private fund documents dance around the one certainty they should address head-on: death. LPAs treat it like a remote, almost theoretical risk, tossed into the same bucket as early retirement. But if we’re being honest (and maybe a little pessimistic) the odds of death are higher than the odds of producing consistent alpha.

I feel like this should scare LPs a lot more than it does.

“Yeah, but we’ve never really had that happen.”

Right, but is that ever a good reason not to do something, given the stakes?

There are large endowments and pensions out there who commit to no more than 2, maybe 3, new private fund managers every year. That’s it.

You’ll hear LPs say that a manager’s real value isn’t found in a spreadsheet or an investor letter. It’s their judgment, their instincts. Their “secret sauce.”

And once that’s gone, it’s gone.

You can’t cut and paste someone’s investment intuition into a successor’s brain. Yet most LPAs rely on a thin key person clause and a ticking 90- to 180-day suspension window, as if that’s sufficient to guard the heart of the fund.

Sometimes I wonder: why do we obsess over criminal background checks, financial statements, and reference calls, but tiptoe around the most obvious diligence question of all—is this person healthy enough to manage a fund whose life likely will exceed a decade?

It feels almost taboo to ask. But so is wiring $50 million to a solo founder and pretending mortality is someone else’s problem.

If a fund manager is undergoing chemotherapy, battling heart disease, or living with a degenerative illness, shouldn’t that be as material to an LP’s decision as past returns?

Today, there’s no real framework to even bring this up. No clean way to diligence it. We operate under the polite fiction that humans are indefinitely durable until they aren’t.

Is that reckless?

The real evolution of key person protections isn’t about adding more tiers or inventing fancier voting mechanics. It’s about acknowledging that the fund’s most valuable asset is deeply fragile. And pretending otherwise gives everyone a false sense of security.

I get it, HIPAA (the federal law regulating US healthcare privacy) exists. But still, should etiquette override prudence if it’s pensioner money?

Revamped LPA Clause

I’d like to take a crack at what this might look like in a change to quasi-standard LPA language.

To position the problem more clearly, consider the fact that prevailing key person clauses generally focus on departures or deaths but ignore gradual capacity erosion.

And if a solo manager is quietly experiencing deteriorating judgment because of a medical condition, there is no guaranteed way for LPs to know that (notice rights) or do something about it (consent, suspension, or approval rights).

As such the situation demands a modestly provocative examination of what constitutes material information about a manager.

Here’s my free-written form [additional thoughts in brackets]:

Each Key Person shall, as a condition to their designation, represent and covenant to the Partners [inclusive of the GP and LPs] that, to the best of their knowledge, they are not currently experiencing any medical condition reasonably expected to materially impair their ability to perform their duties over the Term [usually 10-12 years] of the Fund.

If, during the Investment Period [when the fund is actively making investments], a Key Person is diagnosed with or undergoes treatment for a condition that materially impacts their ability to fulfill their responsibilities, the General Partner shall promptly disclose to the Limited Partners that a Health-Related Key Person Event [we could define this broadly] has occurred. The specifics of the health condition need not be disclosed [maybe except to the LPAC if there is one?].

Upon such notification, the Investment Period will be suspended and cannot continue without the express approval of the Limited Partners. [I feel like this could mean that no new investments can be made until LPs review and vote on whether to proceed with the fund’s activities in light of the health-related situation.]

Would it be perfect? No. It would still rely on the Key Person’s self-reporting. But so does every moral hazard in private fund structures—from valuation of assets to disclosure of conflicts. We already trust, and verify, where we can.

Why not here?

At the very least, it would move the conversation out of the shadows.

Remember this ain’t legal advice!