Avoiding common pitfalls in LP Transfers Pt. 2

In our last blog 'Avoiding common pitfalls in LP Transfers Pt. 1' we looked at some of the common pitfalls that can come up at the start of the LP transfer process.

Below, we will look at some other common issues that may arise during the transfer process and steps GPs can take to avoid them.

1. Separate Legal Personality

If the fund is structured as either an English or a Scottish limited partnership, you will need to check that the proposed transferee has separate legal personality, as English and Scottish limited partnerships cannot admit any limited partners who do not have separate legal personality. This requirement continues to apply even where the partnership has migrated to another jurisdiction.

As an example, an English limited partnership does not have separate legal personality (and so cannot invest in an English or Scottish limited partnership). A Scottish limited partnership, however, does have separate legal personality (and so can invest in an English or Scottish limited partnership). Luxembourg and Delaware limited partnerships also have separate personality (and so can invest in an English or Scottish limited partnership).

If a proposed transferee does not have separate legal personality, you will need to consider restructuring how it will hold its interest in the fund (for example, having its general partner hold as trustee) to avoid this issue.

2. Timing

As we discussed in our previous blog '5 ways to make your LP transfer process more efficient', building a standardized transfer process and setting clear expectations with transfer parties can help reduce reactivity, costs and complexity.

Particularly, establishing up-front that transfers will only be accommodated at fixed times (e.g. quarter-end) and setting clear deadlines for giving notice of transfer requests will avoid teams being overwhelmed with ad-hoc requests or having to respond within short timeframes. It also allows you to choose a date which will not cause issues from a reporting perspective.

Conversely, however, if notice is given very early (or where the timing of the transfer is delayed e.g. due to PTP concerns), the fund may be due to make distributions and/or drawdowns in the period before the transfer completes. These can potentially affect pricing. While it is certainly not the GP’s responsibility to get involved in pricing discussions, being transparent about timings of distributions and drawdowns (to the extent possible, given confidentiality concerns surrounding investments and divestments) will certainly be appreciated by the transfer parties and offer an enhanced investor experience.

It is therefore important to make sure that the finance and administration teams are aware of transfers and alert the legal team to timings of distributions and drawdowns.

3. Signing

Signing should be the easiest part of the process, but in reality it can sometimes be somewhat frantic and time-consuming.

If you have independent directors or other external signatories, be mindful that they may not generally be able to sign immediately, especially if they are on a different time zone or have obligations to other clients, and may want to be able to ask questions of you / your legal team before signing.

Giving clear advance notice of any signing requirements and timeframes and agreeing clear protocols of what information signatories need to see before they will be asked to sign (e.g. email confirmations on KYC and tax clearance; a summary of any deviations from the standard transfer documents and reasons for the transfer; etc) can hugely simplify the process on the day.

Other deal-specific signing requirements may also apply, which may slow down or alter the signing process. For example, transfer parties may request that documents be signed and retained off-shore due to stamp duty concerns. Additionally, certain jurisdictions may require documents to be signed under power of attorney.

Making sure that all signatories are aware of any such requirements as early as possible will ease the process and make sure no mistakes are made on the day.

4. Subscription Line Facility

If the fund has a subscription line facility in place, it is important to remember that the bank must be notified of (and possibly even consent to) a transfer before the transferee can be added into the borrowing base. There may also be a requirement to send a security notice to the transferee in order to perfect the bank’s security.

Facility agreements will usually require that the bank be given notice of any transfers within a fixed timeframe (e.g. within 10 business days of the transfer completing). Banks will also usually require that certain information and confirmations be provided with the notice – e.g. a copy of the transfer agreement and any side letter (or confirmation that no side letter was given), an updated LP register, confirmation that KYC checks have been completed and, if relevant, evidence that a security notice has been sent to the transferee.

This is a point which can be missed by GPs in the post-closing period, but is important to observe in order to avoid issues with future drawdowns under the facility. If the bank does not find out about a transfer until later, when the fund tries to make a drawdown (at which point it will likely need to provide a compliance certificate and updated LP register), there may well be a delay in funding while the bank adds the transferee to the borrowing base. Additionally, such breaches may ultimately lead to trust issues between the bank and the GP.

5. Filings

Remember that some jurisdictions may require certain filings or notices be made post-transfer.

If the transfer is in an English or Scottish limited partnership (rather than a private fund limited partnership), the GP must file an LP6 with Companies House and publish a notice in The Gazette. The transfer will not be legally valid until such notice is published. This filing requirement continues to apply even if a partnership has migrated to another jurisdiction.

Our experienced team can assist with any specific filing or notice requirements.

Conclusion

As transfer volumes increase and GPs face substantial competing demands on their time, being aware of the common pitfalls that can arise on a transfer and having an understanding of how to avoid (or at least manage) these can help keep processes running smoothly. This can improve the experience for transfer parties, third party providers and in-house teams, and reduce cost.

Our experienced team can help you build the right standardized transfer process for your funds, taking into account any specific jurisdictional, contractual and/or tax requirements which need to be accommodated. Find out more about our LP Transfer service.