LPs Win One At The Negotiating Table

Investors haven’t been in the driver’s seat for some time when it comes to negotiating terms of their LBO partnerships. Nevertheless, over the last few years they have succeeded in winning tougher key-person provisions, which are designed to protect investors in cases where key people abscond from a firm.

Several years ago, a typical key-person provision would require an automatic 90-day suspension of investments after a certain number of senior professionals named “key” in the partnership agreement left or, for some other reason, stopped devoting substantially all of their business time to the enterprise.

During the suspension the buyout shop would be expected to develop a plan to deal with the departures, and share it with backers. Once the 90 days was up, the firm would have the green light to return to investing unless, dissatisfied with the plan, limited partners voted to again suspend investments.

But key-person provisions written this way have at least two flaws, from a limited partner’s perspective. First, they don’t guard against a mass walkout of professionals below the senior level, which can be just as detrimental. And second, it is very difficult, as a practical matter, to get a majority or two-thirds of limited partners (as often required) to agree to a suspension—even if it seems clearly in their interests.