VC & PE Glossary
What Is No-Fault Divorce?
Updated
Definition
No-fault divorce in fund documents allows limited partners to remove or replace a general partner — or terminate the fund's investment period — without proving misconduct, usually via a supermajority LP vote.
Useful for: LPs, GPs
No-fault divorce is a limited partner protection in the limited partnership agreement (LPA) that permits removing the general partner or ending active investing without requiring proof of wrongdoing.
How it works
LPAs specify vote thresholds — often 75% or more of LP interests — to cause GP removal, key person replacement, or termination of the investment period. “No-fault” means LPs need not allege fraud or material breach; sustained underperformance, style drift, or loss of confidence can motivate the vote if politics align.
Upon trigger, a successor GP or administrative liquidator may manage existing assets while new investments stop. Economics for the removed GP — carry, management fees, and liability — depend on negotiated LPA language and side letters.
No-fault divorce differs from for-cause removal, which requires defined breaches. It also differs from voluntary fund wind-down when the strategy is complete.
Why it matters
- LPs: It is a backstop when governance fails or teams scatter. Institutional LPs track whether divorce rights are standard in the vintage and use them sparingly because transitions are costly and disruptive.
- GPs: Strong reporting, LPAC engagement, and aligned strategy reduce tail risk. Divorce clauses influence how aggressively GPs pursue extensions or successor funds after a weak vintage.
Common mistake
Assuming no-fault divorce instantly liquidates the portfolio. Most structures continue holding assets for years; the change is who decides exits and fees, not immediate cash return.
Related ideas
See also LPA, key person risk, LPAC, and investment period termination.
Related terms
- Key-Person Risk — Key-person risk is the dependence of a company or fund on one or a few individuals whose departure would materially harm operations, fundraising, or investor confidence.
- Limited Partnership Agreement (LPA) — The limited partnership agreement (LPA) is the governing contract between a fund's general partner and limited partners — covering economics, governance, capital calls, distributions, and termination.
Common questions
Short answers for founders, LPs, and operators