Key Person Dependency Risk
Key person dependency risk is the risk that performance and decision quality rely disproportionately on one or two individuals—creating fragility if they leave, become distracted, or lose credibility.
Key Person Dependency Risk is the concentration of decision-making, sourcing, underwriting, or LP relationship management in a small number of individuals—often the founder, CIO, or lead partner. It matters because private market strategies are human systems. If the key person is unavailable, the investment engine can stall, portfolio decisions can degrade, and trust can break quickly.
Allocators don’t require founders to be replaceable. They require credible continuity: clear roles, bench strength, incentives, documented process, and enforceable key person provisions.
How allocators define key person risk drivers
Allocators evaluate key person risk through:
- Decision concentration: who truly decides and how committees function
- Sourcing concentration: dependence on one network
- Underwriting concentration: who owns models, theses, and risk controls
- Client dependence: LP relationships tied to one individual
- Succession planning: credible second layer and transition plan
- Incentive alignment: retention risk and economics distribution
- Key person terms: what happens contractually if key person is gone
Allocator framing:
“If the key person steps away, does the system continue—or does the edge disappear?”
Where key person risk is highest
- emerging managers and founder-led platforms
- niche strategies dependent on specialized expertise
- firms with weak partner depth or high turnover
- rapid fundraising and scaling periods
How key person risk changes outcomes
Well-governed key person risk:
- increases allocator comfort and re-up probability
- reduces platform fragility
- improves resilience during life events and stress
- supports institutionalization over time
Unmanaged key person risk:
- increases probability of non-re-up
- triggers legal/ODD vetoes
- causes slowdowns in investment pace and portfolio management
- increases risk of fundraising failure under disruption
How allocators evaluate discipline
Conviction increases when managers:
- demonstrate a real bench with decision authority
- document repeatable process beyond one person
- align incentives to retain the second layer
- disclose succession planning and role clarity
- accept enforceable key person provisions without evasiveness
What slows allocator decision-making
- “we’re a team” narrative with no evidence of delegation
- unclear partner economics and retention risk
- key person clauses that are weak or too discretionary
- signs of distraction (multiple ventures, diluted focus)
Common misconceptions
- “Key person risk is only legal language” → it’s operational reality.
- “Strong founders make it fine” → strong founders can still be single points of failure.
- “Bench strength is obvious” → it must be proven through roles and history.
Key questions during diligence
- Who makes final investment decisions and how is that documented?
- What happens if the key person is unavailable for 6–12 months?
- Who owns portfolio management and follow-on decisions?
- What retention incentives exist for the second layer?
- What are the key person terms and how enforceable are they?
Key Takeaways
- Key person dependence is a fragility multiplier in private markets
- Bench strength + documented process reduce dependency
- Enforceable key person terms are a governance trust signal