Key Person Risk
Key person risk is the risk that fund performance and process depend heavily on a small number of individuals.
Allocator relevance: A major fragility driver—if the key person leaves, track record relevance and execution quality can collapse.
Expanded Definition
Key person risk is highest when investment judgment, sourcing relationships, and portfolio management are concentrated in one or two people. It is amplified in emerging managers, small teams, and strategies reliant on proprietary deal flow. Even with strong branding, the real risk is process discontinuity.
Allocators mitigate key person risk through diligence on team structure, delegation, institutionalized process, and key person clause strength.
How It Works in Practice
Teams evaluate who truly makes decisions, who owns key relationships, and whether the investment process is repeatable without a single individual. They also track turnover history and role concentration.
Decision Authority and Governance
Governance controls include key person clauses, documented underwriting standards, and succession plans. Without these, allocators bear hidden concentration risk.
Common Misconceptions
- Big-name founders eliminate key person risk.
- A multi-partner firm has low key person risk by default.
- Key person risk is only about departures (it can also be about distraction).
Key Takeaways
- Key person risk is a people concentration risk.
- Evaluate real decision concentration, not org charts.
- Governance and process institutionalization are mitigants.