US funds spurn no-cause GP removal clauses

The provision has increased across global funds, fund terms research shows.

No-cause general partner removal rights are far less prevalent in US private equity funds than in their counterparts in the rest of the world, according to fund terms research from alternative assets consultancy MJ Hudson.

One-third of US funds include this right in their terms and conditions, compared with 68 percent of the overall sample of global funds launched in the 12 months from April 2016.

“[This] confirms a widely held perception that US funds continue to be resistant to this much-sought investor protection when contrasted with their European peers,” the report said.

The number of funds including a no-cause removal clause has increased by 12 percentage points year on year, the data show. But GPs have tempered this apparent increase in LP assertiveness by delaying the investor’s ability to exercise the no-clause removal right, typically by two years from final close.

The majority of funds containing the clause entitle the GP to management fee compensation if it is removed for no cause. In just over half of these cases the GP is entitled to the equivalent of 12 months of fees.

Carried interest compensation in the event of no-cause GP removal was allowed by all funds, with 69 percent entitling the GP to full carried interest in respect of investments made prior to the date of removal.

Almost all funds – 96 percent – have a removal-for-cause condition, but the effectiveness of this is blunted in some cases by the lack of economic disincentive for a GP. The majority retain at least half of carry is they are removed for cause, with just under one-third imposing a full haircut on carry in the event of a for-cause removal.