Avoiding common pitfalls in LP Transfers Pt. 1

As the secondaries market continues to grow, GPs are seeing increasing volumes of LP transfer requests.  

In-house teams are under pressure to accommodate transfer requests in a cost and time-effective manner, without compromising investor experience.  

We’ve compiled a list of the common questions and pitfalls we see GPs come up against. Knowing to spot these issues early, and how you remedy them, can help make the transfer process easier and less burdensome for you and your transfer parties.

In the first part of this series, we’ve looked at the six most common issues to look out for at the start of the LP transfer process.  

1. Is there a transfer?

While most transfers will be clearly identifiable to both the transfer parties and the GP, some transfers may be a little more difficult to spot.  

Sometimes, what looks like a simple investor request to record a change of name on the LP register or notice of change of contact details can actually be a transfer requiring the GPs consent.  

For example: the limited partner on record is “ABC Limited as custodian for [investor]”. The investor sends an email to the administrator noting that the contact details for its custodian have changed and asking the administrator to update its records accordingly.  

On further investigation, it is clear that the investor has appointed a new custodian, XYZ Limited, in replacement of ABC Limited. This technically constitutes a transfer of interests in the fund as the limited partner on record is changing from “ABC Limited as custodian for [investor]” to “XYZ Limited as custodian for [investor]”. 

These sorts of requests will often be sent directly to the investor relations team or administrator, with investors seeing them as an administrative matter rather than as a transfer requiring GP consent. Because of this, it is important to ensure these teams are sufficiently trained to be alert to these types of requests.  

Notices of change of name or form of an investor, or changes to the investor’s administrator, custodian or nominee should always be referred to the legal team to check. While they may well turn out to just be a change of name, it’s worth checking early on. This gives you time to manage the investor’s expectations, especially as they will likely not be expecting to have to go through a full transfer process (including KYC checks, legal fees and signing documents).    

2. Know Your Customer (KYC)

If we could offer just one piece of advice for managing LP transfers it would be this: start the KYC process as early as possible.  

As global KYC checks become more stringent, the KYC process can actually become the hurdle that stops a transfer from completing within the anticipated timeframe.  

Increasingly, KYC is becoming a pain point for both GPs and transfer parties. This is especially true where transferees are less used to dealing with KYC requests or do not have their own in-house legal or compliance team who can provide certified copies on demand.  

Given these issues, choosing a provider that has KYC capability in-house can help ensure an easier and quicker transfer process and reduce the burden on the transfer parties. 

3. Check the details

It is crucial to reconcile all transfer requests against the LP register. 

Where funds are older and investors have held their interests for 10+ years, it is possible that changes may have been made to the name or form of the investor which have not been notified to the GP. If those changes constituted a transfer (as outlined above), it will be necessary to document this before the new transfer can be allowed to proceed.  

Additionally, mistakes can happen (especially where an investor has made its investment through multiple vehicles with slightly different names and commitment amounts), and records may have been mislaid. The information included in the transfer request may not quite match up with the GP’s official record. Checking these details early on means there will be time to fix any potential issues before the transfer deadline.  

4. Confidentiality 

As part of a third-party transfer process, the selling LP will want to be able to share information about the fund and its investments with prospective buyers. However, the GP will understandably want to ensure that the confidentiality of its information is properly protected.  

While some LPs may have enhanced disclosure rights in their side letter, LPs are generally under strict confidentiality obligations which prevent them from sharing confidential information with third parties.  

Given the importance of protecting their information, confidentiality is a key point for GPs to think about when receiving transfer requests. Our specialist contracts team can advise on any particulars surrounding confidentially agreements or coverage.  

5. Tax  

Transfer requests can bring with them a host of tax concerns for both the transfer parties and the GP.  

The key topics of PTP (the “publicly traded partnership” rules) and ECI withholding are beyond the scope of this short article but are points on which GPs should make sure to receive advice from specialist tax counsel before permitting any transfers.

Beyond these two topics, GPs should also consider the specific structuring of the interest being transferred.  

On its admission to the fund, a transferor may have elected to participate through a particular structure (e.g. a blocked vehicle) in order to accommodate its specific tax requirements. If the buyer has the same tax concerns or is comfortable to hold its interest in the same way, the transfer should be relatively simple. However, if the buyer has different tax requirements requiring it to invest via a different structure, the transferor may request to transfer its interest to the relevant structure before transferring to the buyer.  

GPs will need to carefully consider any such requests with their tax counsel to ensure that such transfer does not cause tax issues for the fund or other LPs. 

Tax structuring discussions can be time-consuming and expensive (requiring input from multiple teams), so it is important that these issues are identified as early as possible and that transfer parties are kept apprised of discussions and costs.

6. Subscription Agreement Updates 

If this is the first transfer since the fund held its final closing (or even the first transfer in the fund for a long period), it is a good idea to revisit the subscription agreement / investor eligibility questionnaire to make sure it is tailored to a transfer scenario rather than a primary fundraise and to ensure that any relevant tax, regulatory or compliance updates have been incorporated.   

Conclusion

It is important that GPs have an awareness of common issues that may arise on LP transfers.  

While some issues and complexities may be unavoidable, being able to identify them early can be key to ensuring that the fund’s interests are properly protected. Especially where a transfer may expose the fund and/or its LPs to certain tax risks, being able to expedite quickly to expert counsel will give GPs more time to resolve any issues in the best way to protect the fund and its LPs.   

For GPs, maintaining a good investor experience on LP transfers is a critical concern. Identifying issues earlier in the process will make it easier to manage the expectations of transfer parties. This is particularly true if the timeframe requested for a transfer cannot be met or costs are likely to be higher than originally anticipated.  

In our second installment, we will look at a few more common pitfalls that can arise towards the end of the transfer process and how to manage these.  

Avantia's dedicated team use proprietary technology and processes to work with GPs to manage LP transfers. By automating key workflows we’re able to provide a better investor experience and reduces costs for everyone. Find out more about our LP Transfer service.