A no-fault divorce clause is a provision in the limited partnership agreement that gives LPs the right to remove the GP or terminate the fund without having to prove misconduct, fraud, or breach of fiduciary duty. Unlike for-cause removal, which requires demonstrating specific wrongdoing, a no-fault divorce can be triggered by a supermajority vote of LPs for any reason, including loss of confidence in the investment team, persistent underperformance, or strategic disagreements about portfolio direction.
The mechanics are relatively straightforward. The LPA specifies a voting threshold, most commonly 75% of limited partner interests measured by capital commitment. If that threshold is reached, the GP is removed and a successor GP is appointed to manage the existing portfolio. The fund does not necessarily liquidate. Instead, the successor manager takes over portfolio management, follow-on investment decisions, and the eventual realization of existing investments. The removed GP’s economic rights, particularly carried interest on existing investments, are governed by the LPA’s removal provisions.
The no-fault divorce clause exists because LP protection mechanisms that require proving “cause” are difficult to use in practice. Proving fraud, gross negligence, or willful misconduct requires legal proceedings, discovery, and litigation, a process that can take years and cost millions while the fund’s assets sit in limbo. A no-fault mechanism gives LPs a cleaner path to act when they have lost confidence in the GP, even if the GP’s behavior does not rise to the level of legal cause. The provision gained significant traction after the 2008 financial crisis, when several funds experienced severe performance deterioration and LPs had limited recourse beyond withholding re-ups.
For the GP, the no-fault divorce clause represents a meaningful governance concession. Some GPs resist the provision entirely, particularly established firms with strong track records. Others accept it but negotiate protective features: higher vote thresholds (80% or above), mandatory cooling-off periods before the vote is finalized, restrictions on who can serve as successor GP, and protections for the removed GP’s carry on investments already made. The GP commitment adds another dimension. If the GP has significant personal capital in the fund, the terms should address whether that commitment converts to a passive LP interest or is treated differently after removal.
From the LP perspective, the no-fault divorce is a governance right that they hope never to use. The real value is in the behavioral incentive it creates. A GP who knows that 75% of LPs can vote them out has a structural reason to maintain open communication, address LP concerns proactively, and avoid the kind of unilateral decision-making that erodes trust. For emerging managers raising capital, offering a reasonable no-fault divorce provision (75% threshold, ILPA-aligned) signals confidence and alignment. Resisting the provision, or insisting on a 90% threshold that effectively requires unanimity, sends the opposite signal and creates friction during due diligence.
Frequently Asked Questions
What vote threshold is required for a no-fault divorce?
Most LPAs require a supermajority vote, typically 75% to 80% of limited partner interests by commitment amount. Some funds set higher thresholds (up to 90%) or add procedural requirements like a mandatory discussion period before the vote. The ILPA recommends a threshold no higher than 75%, arguing that higher thresholds effectively make the provision unusable.
What happens to the GP's economics after a no-fault divorce?
This is heavily negotiated. In most structures, the GP retains carried interest on investments made prior to the removal date. Some LPAs reduce the carry rate (e.g., from 20% to 10%) as a compromise. The management fee typically terminates or steps down to a reduced rate sufficient to cover wind-down costs. The successor GP's compensation is a separate negotiation between the LPs and the new manager.
How common are no-fault divorce clauses in practice?
No-fault divorce provisions are standard in institutional-quality fund documents and have been an ILPA best practice recommendation since 2009. Actual exercise of the clause is extremely rare. The provision functions primarily as a deterrent and a governance backstop. Most GP-LP disputes are resolved through negotiation long before a formal vote is called.
