What are Excluded Obligations?

Excluded Obligations refer to the liabilities and responsibilities which remain with the seller and are not assumed by the buyer upon the closing of the transaction. In essence, they are carved out from what the buyer agrees to step into. A typical example would be liabilities arising due to the seller’s breach of the underlying fund documents. Another typical example of an Excluded Obligation would be the seller’s taxes – the seller would typically be responsible for paying its own taxes regardless of whether the tax liability is discovered before or after closing and also in cases where the fund or buyer makes a tax payment on the seller’s behalf. The exact scope of the Excluded Obligations is often negotiated at length. We will explain the various components and how they are commonly found in PSAs below.

PSA mechanics

From a legal drafting standpoint, Excluded Obligations is typically a defined term that includes a catalogue of obligations and responsibilities that shall remain with the seller after the closing of the transaction. Close attention is required to assess the interaction with other key defined terms, such as LP Clawbacks, Distributions and Cut-Off Date since these will set limitations for certain components of the Excluded Obligations.

The Excluded Obligations concept is typically backed by a full indemnity from the seller. In some instances, however, the seller may seek to limit the application of the indemnity in:

i) time (typically in the range of 1 – 3 years with carve outs for certain matters such as fraud or willful misconduct of the parties which tend to survive the earlier until the expiration of the applicable statute of limitations or the dissolution of the partnership); and/ or

ii) amount (by a cap and/or basket/minimum threshold (such as 1 – 2% of the aggregate purchase price)).

From a buyer’s perspective, such limitations would typically not be accepted given the nature of Excluded Obligations being matters that should remain with the seller. In cases of liquidating sellers, the buyers need to give additional thought to the topic and seek to assess how such increased risks will affect the underwriting as well as whether additional comfort could be obtained, e.g. via diligence and/or a W&I policy.

Current Market Standard

We carried out a detailed analysis on 100+ PSAs that we have negotiated in 2024 and 2025 (mixed buyer and seller representations) and generated statistical insights on the typical scope of Excluded Obligations based on the results. To give an overview, we split the types of Excluded Obligations into the following buckets:

1. Breaches by the seller of the PSA;
2. Breaches by the seller of fund agreements;
3. Liabilities arising from acts or omissions by the seller that relate the period before the transfer is made effective;
4. Losses with respect to the Interest which arise, accrue or relate to the period prior to the Closing Date;
5. Liabilities arising out of LP clawback obligations;  For DMX insight on LP clawbacks, click here;
6. Waived or deferred management fees or carried interest relating to the period prior to the cut-off date;
7. Tax liabilities of the seller relating to the seller’s ownership of transferred interests;
8. Tax liabilities of the seller relating to the sale of its interests;
9. Liabilities relating to excluded interests, i.e. interests that were not transferred to the buyer; and
10. Liabilities or obligations with respect to the transferred interests pursuant to agreements other than the fund documents disclosed to buyer.

It should be noted that the devil is often in the detail, and there are further layers and nuances required when negotiating PSAs. The statistics we collected do, however, illustrate how often certain liabilities and obligations are included in the definition of Excluded Obligations:

A few observations can be made from the statistics:

• some items, such as liabilities due to the seller’s breach of the underlying fund agreements, and taxes accruing to the seller’s ownership of the transferred interests, are nearly always included in the concept of Excluded Obligations and should as such be considered as clear market standard.
• certain items, such as any pre-closing liabilities arising due to the seller’s acts or omissions, or any liabilities arising relating to an Excluded Interest are often but not always included, even though that logically the risk should remain with the seller. It could also be the case that certain risks are not present in all transactions, e.g. single-line transactions may not have the concept of Excluded Interests in the PSA.
• some items are tailored per transactions, e.g. LP claw-back liabilities.

Post-Closing Monitoring

As mentioned above, the Excluded Obligations is a common concept in secondaries PSAs which is typically required to implement the commercial deal between the seller and buyer. Nevertheless, it is in our experience rare that buyers make claims against sellers relating to Excluded Obligations after a deal has closed. The reason for this is likely twofold; firstly, in the case of potentially significant obligations, e.g. if the seller has materially breached its obligations towards a fund, the buyer is likely to be aware of it before closing and will seek to ensure that any liabilities for breaches are settled prior to closing, and secondly, in terms of other obligations, the buyer may not monitor and enforce its rights, or alternatively may not bother enforcing its rights for immaterial obligations.

On the latter point, it is often not operationally feasible for high volume buyers to monitor whether there could be potential claims under Excluded Obligations, in particular when it comes to items that is difficult to discover, e.g. a seller clawback liability that is offset against exit proceeds from another investment or management fees relating to the pre-cut off period that is paid out of fund income. It could, however, be advisable for buyers to, as a minimum, implement processes with certain checks, e.g. items identified on distributions notices, such as tax liabilities.

Conclusion

The concept of ‘Excluded Obligations’ remains a key risk allocation measure between parties to a secondary transaction which, coupled with the relative commercial position of the parties, and its interaction with other PSA provisions ought to be afforded due attention to in PSA negotiations.

Well-engineered concepts not only ensure that the transfer documents accurately capture the commercial deal between the transferring parties but also pave the way for allocation of historical liabilities to the party that’s best placed to bear them.

DMX Partners is a law firm specializing in indirect investments in private markets and their mission is to partner with clients to deliver seamless, efficient transactions. They take a fresh, client-centric approach to legal transactional support; the team is composed of lawyers and dedicated transaction closers and the role they take also includes tasks typically handled by internal counsel. In the last year, they closed 100+ transactions across single line and portfolio LP transactions as well as GP-leds representing a variety of dedicated secondaries funds, institutional asset managers and family offices. DMX is supporting clients globally and recently built out their US presence.