No-fault removals and key-person issues: drama in the market
Happy Friday!
Hope your week went well. Got some stuff on fund terms lately. What kind of interesting terms are you seeing on new funds, anything innovative, different, egregious? Hit me up at cwitkowsky@buyoutsinsider.com.
Divorce: Limited partners generally like to see private equity funds that include provisions allowing them to remove the manager without cause, with the proper amount of LP votes.
However, in the U.S., the majority of private equity funds don’t include this type of rule, known as a no-fault divorce clause.
A recent survey from MJ Hudson found that only about 23 percent of U.S. funds included no-fault removal provisions, compared to 85 percent of European funds. This is up from 18.2 percent of U.S. funds that included such provisions in last year’s survey.
Overall, no-fault divorce clauses appear to be on the rise around the world, despite the U.S. sluggishness in adopting such measures, the survey found. Around 63 percent of all funds contained no-fault removal rights, an increase from 2018, when 53 percent of all funds contained such provisions.
Around 31 percent of 42 North American buyout funds have no-fault removal provisions, according to Buyouts’ 2018-2019 Private Equity/Venture Capital Partnership Agreements Study. For funds that have such provisions, a majority mandate that 75 percent of the LP base agree to proceed with the no-fault removal, Buyouts’ study said.
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