Key-person risk — the question most DDQs answer badly

The most predictable question in fund diligence is also the one answered worst. Key-person risk in a fund is really three questions — who actually holds decision rights, what the documents do when that person stops, and whether the plan fits the size of the firm — yet the standard DDQ response is a paragraph of reassurance that survives no follow-up. The weakness is structural, and it starts with the questionnaire itself.

The questionnaire fragments the answer

ILPA’s Due Diligence Questionnaire 2.0 — the closest thing private funds have to a standard — opens its succession section with a question of disarming simplicity: “Is there a succession plan for the Firm?” But the next three questions do not ask for the plan. They ask whether the GP is “willing to discuss during in-person conversations” how the plan handles transition of roles, transition of economics, and voting rights. The template itself assumes the real answer arrives live, not on paper.

The contractual mechanics sit further down the same section: whether a key-person event occurred in the last two predecessor funds, and an overview of the provision itself. The operational side sits in a different section entirely — the business continuity plan is requested as an attachment, with significant BCP changes asked about elsewhere. A manager answering each box where it sits produces a succession paragraph in one place, a clause summary in a second, and a continuity PDF in a third, with nothing reconciling them. The questionnaire fragments the question. Most managers let it fragment the answer.

The regulator already wrote the standard

The SEC drafted the adequate answer in public. In June 2016 the Commission proposed rule 206(4)-4 under the Advisers Act, which would have required every registered adviser to maintain written business continuity and transition plans, listing the “unexpected loss of a service provider, facilities, or key personnel” among the situations a plan must address. The proposing release put the stakes plainly: “We believe it would be fraudulent and deceptive for an adviser to hold itself out as providing advisory services unless it has taken steps to protect clients’ interests from being placed at risk as a result of the adviser’s inability (whether temporary or permanent) to provide those services.”

The rule was never adopted. The standard it articulated did not disappear; it migrated into diligence practice. Note the parenthetical. The release states that key-person contingency planning “generally should address both the temporary or permanent loss of such personnel.” A founder unreachable for three weeks is a key-person event in miniature, and a plan that only contemplates death has answered half the question.

The same expectation appears wherever a fund touches a regulator. NASAA’s model rule, in the states that have adopted it, requires state-registered advisers’ plans to provide for “assignment of duties to qualified persons in the event of death or unavailability of key personnel.” NFA-member CPOs and CTAs must maintain a written plan “reasonably designed to enable the Member to continue operating, to reestablish operations, or to transfer its business to another Member with minimal disruption” — and NFA’s self-examination questionnaire carries a dedicated continuity appendix a diligence team can request. Since 2023, CIMA’s governance measures for Cayman funds keep the oversight function with the fund’s operators even where management is delegated — not a succession mandate, but a named body formally accountable for supervising the manager. The jurisdictions differ; the convergence does not.

What the documents do when the person stops

The key-person clause is where concentration of decision rights becomes enforceable. Under ILPA’s model limited partnership agreement, key persons must devote substantially all their business time to the fund complex during the commitment period; a key-person event automatically suspends the commitment period, which terminates unless a majority in interest of LPs approve a remediation plan or waive the suspension within 90 days. Market practice is frequently softer: key-person rights commonly sit with the advisory committee, cure windows run 90 to 180 days, and investing during suspension is limited to follow-ons and reserved matters absent LPAC approval. Practitioner commentary puts the common triggers at departure, incapacity, or insufficient time commitment — drafted as a hard threshold of at least 80 percent of business time, or as flexible “substantially all” language. A reader who has not traced who triggers, who decides, and who keeps deploying capital during the argument has not read the provision.

Behind the drafting sits a statutory backstop most DDQs never mention. For a Delaware limited partnership, the default consequence of a general partner’s withdrawal is dissolution: the fund continues only if another general partner remains and the agreement permits continuation, or if within 90 days the remaining partners agree — absent a continuation right in the agreement, by a vote of more than half — to carry on the business and appoint a replacement. Where the continuity drafting fails, the fallback is not seamless succession. It is a wind-down clock.

A credible answer scales with the firm

The 2016 proposing release made proportionality explicit: a plan should reflect “the nature and complexity of the adviser’s business, its clients, and its key personnel,” with a large multi-office adviser’s plan expected to differ significantly from a small firm’s. CIMA frames its governance expectations the same way — proportionate to size, complexity, and risk profile. Practitioner commentary observes the same gradient in fund terms: emerging managers typically designate one or two key persons; established firms name several.

For a two- or three-person firm, the credible answer is honesty plus mechanics: the single point of failure named rather than disguised, documented authority over who can trade, sign, and instruct during a temporary absence, a key-person clause that covers the actual person, and continuation language read against the statutory default.

For a mid-sized firm, the credible answer is evidence that decision rights have genuinely distributed — an investment committee that functions on the record, more than one named key person, and economics that give the second generation a reason to stay through a trigger event.

For an institutional platform, the credible answer is the full ILPA set delivered without flinching: transition of roles, economics, and voting rights addressed in writing, and any key-person event in the predecessor funds disclosed rather than discovered.

The failure mode at every size is borrowing the next tier’s language — the two-person firm claiming a deep bench, the platform offering a single paragraph of reassurance.

Answer it once, in one place

The fix is not better wordsmithing in the succession section. It is one internal document that holds the entire answer — today’s actual concentration of decision rights, the contractual trigger and its consequence, the temporary-absence protocol, the statutory fallback, and how each element matches the firm’s size — from which every questionnaire response, attachment, and live meeting quotes. The standard DDQ fragments the question by design. Whether the answer fragments is the manager’s choice.

SetOne Labs pressure-tests key-person provisions, continuity plans, and the diligence answers built on them — for managers preparing to face the question and for allocators weighing the response. To examine yours in confidence, begin a conversation.

SetOne Labs provides advisory services and general information. Nothing here is legal, tax, or investment advice.