No-Fault Divorce
Private Equity glossary · Private Equity Fundamentals
Definition
An LPA provision granting LPs the contractual right to remove the GP without cause — distinct from for-cause removal (material breach, fraud, gross negligence). Requires supermajority LP consent (typically 75% or higher) and typically carries compensation obligations to the GP (payment of management fees through fund life, accelerated carry vesting on existing investments). No-fault removal is extremely rare in practice — the supermajority threshold is intentionally high and the compensation obligation makes it economically painful for LPs — but its existence provides crucial negotiating leverage to LPs in cases of pattern misconduct that falls short of for-cause triggers.
No-Fault Divorce in plain English
When investors hand their money to a fund manager, they're locked in for many years, so they want an emergency exit. A no-fault divorce clause lets investors fire the manager without having to prove wrongdoing like fraud or gross negligence — 'we just want out,' no reason required. But it's deliberately hard to use: it usually needs a large supermajority of investors to agree (often 75%+) and forces them to pay the manager compensation, like continued fees, so it genuinely hurts to pull the trigger. In practice it's almost never actually used; its real value is as a threat that keeps a manager honest when they're behaving badly in ways that fall just short of outright fraud.
Practice No-Fault Divorce
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