You know the feeling. You finally got the Purchase and Sale Agreement (PSA) signed and the secondary LP deal is practically done. You’re already onto the next one, but there are still a number of items left to sort before closing - transfer documents, KYC, investor questionnaires, etc.
Transfer agreements in LP secondaries are often seen as a necessary evil; something that swamps your inbox, drags out closing and sometimes costs way too much money. You just want them done so that the deal can close (assuming the GP has commercially agreed and welcomes you into the fund).
We have experienced a range of approaches to transfer agreements in the market – from lawyers providing markups as red as a massacre, to investors signing the documents as they are. GPs are often reluctant to make material changes to the documents and taking a pragmatic approach is typically what clients appreciate.
Nevertheless, there are a few things that should always be considered. Below we have summarized three key things that should always be checked.
It may seem too obvious to mention, but we often find that entity names and commitment amounts are not what we expect. In some cases, there are just plain mistakes in the drafts. Other times the details in the transfer agreement turn out to be correct, but inconsistent with PSA. The reasons for this could be that the seller had incorrect or outdated commitment figures on record, or the seller might have participated through Additional Investment Vehicles (AIVs) without knowing it or disclosing it to the buyer. In some transactions, there are multiple buyer entities it also happens that the proportions/commitments stated in the transfer documents are incorrect from the start. The entity names and commitment amounts in the transfer agreements are what will legally be transferred and it is therefore critical to get it right.
Typically, transfer agreements include clauses that oblige the transferring parties to pay for the GPs expenses associated with the transfer. We have, however, also come across transfer agreements that provide for a certain percentage of commitment to be paid as a fee to the GP for handling the transfer. Such clauses are rare, but it is important to identify them, as they could result in transfer costs being significantly higher than usual — depending, of course, on the percentage and commitment size being transferred.
We have also encountered some funds that crystalize carry upon transfer of LP interests. In practice, this is typically implemented by lowering the capital account balance of the interest that is being transferred. Such mechanisms could have a significant impact on the economics for the buyer and must of course be carefully considered. Whilst the relevant provisions of the LPA need to be reviewed, the transfer agreement would typically outline deal-specific details.
PSAs in secondaries are often subject to detailed negotiations that reflect the allocation of risks associated with the transaction between the seller and buyer. Transfer agreements, on the other hand, are usually shorter tri-party agreements between the seller, buyer, and GP. Given GPs’ reluctance to amend terms, transfer agreements often do not align perfectly with the PSA. While the PSA is a lengthier, more detailed document, transfer agreements may include provisions that conflict with those agreed upon in the PSA. For example, the allocation of liability for obligations tied to the interests can differ. PSAs typically include the concept of excluded obligations—where certain liabilities from the period before the transfer remain with the seller. In contrast, transfer agreements generally require the buyer to assume liability for all obligations as of the effective date of the transfer, effectively stepping into the seller’s shoes.
To ensure clarity that the PSA terms continue to govern the deal between the seller and buyer, a PSA conflicts clause should be included in the transfer agreement. In our experience, the majority of first drafts of transfer agreements do not include this clause, leaving it to the transferring parties to insert. The matter is generally uncontroversial, and GPs and their counsel typically accept its inclusion, with only a few rare exceptions.
At DMX Partners, our mission is to provide high-quality, fast and cost-effective execution of investments in private funds. In addition to typical transaction related legal advice, we provide transaction execution support on LP secondaries. We support transfers of single interests or portfolios of LP interests and handle all workflows connected to closing, including transfer agreements, subscription documents, KYC, tax certificates, etc.
(P.S. Don’t forget that ROFR waiver in a TA if needed!)
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