Striking the Right Balance: Navigating LP Transfer Document Negotiations

As GPs tighten transfer policies, limiting negotiations can streamline processes and reduce risk—but a strategic approach can also help maintain positive investor relationships. Here’s how to find the right balance.

As transfer volumes grow, more GPs are implementing stricter policies around their transfer processes. Particularly, we’re seeing clients successfully limiting negotiation of the transfer documents unless there is a strict legal, regulatory or tax requirement that demands it.

As we’ve discussed before, protracted negotiations can cause unnecessary delays, increase costs, distract the GP’s internal teams, and potentially expose the GP and fund to risks.

The ideal approach? Limit all negotiation. However, we acknowledge that there is a delicate balance needed. GPs must ensure that changes to the transfer documents don’t create any risks for the GP, the fund or other investors, but they also want to start their relationship with the incoming investor on a positive note. Shutting down certain negotiation requests might be counterproductive.

Below, our MD, LP Transfers – Lizzie Freeth suggests 4 key common negotiation points which GPs may wish to consider accommodating in the interests of maintaining a good relationship with the transfer parties.

Supremacy of SPA

Where a transfer is between third parties, the transferor and transferee will have likely spent considerable time and money negotiating a sale and purchase agreement (“SPA”) and will want to ensure that this commercial agreement is not overridden by the transfer documents, especially if the GP does not permit any changes.

To address this, transfer parties will commonly request confirmation that, in the event of a conflict between the SPA and the transfer documents, the terms of the SPA will prevail.

GPs typically accept this request, as it limits further negotiation of the transfer documents. However, this should apply between the transferor and transferee only and should explicitly state that the SPA is not binding on and does not affect the rights of the GP or reduce the liabilities or obligations of the transfer parties under the transfer documents.

Fees and expenses

It is market practice for the GP to pass on any fees, costs and expenses (including legal fees and out of pocket expenses) incurred in connection with the transfer to the transfer parties.

Where the transfer parties have negotiated between themselves that fees will be split differently, they may ask for this to be reflected in the transfer documents.

Rather than amending the standard language (which can risk the GP being left out of pocket), GPs often take a simpler approach – issuing split invoices and requiring full payment as a condition precedent to granting their consent.

Access to Information

In some cases, departing investors may need access to historical information in order to comply with legal, tax, regulatory or other filing or reporting obligations. They’ll often ask for this to be accommodated in the transfer documents.

It may be in the GP’s best interest to allow this, to ensure that the transferor isn’t relying on outdated information. But protections are key:

Strict confidentiality obligations (as per the LPA) must continue to apply.

GPs should only be required to provide standard reports—delivered at the same time as to other LPs.

Side Letter Requests

Affiliate transfers

Side letter rights generally attach to the investor, not the commitment. They don’t transfer automatically unless the original side letter explicitly allows an affiliate transferee to benefit.

GPs have discretion to decide whether to allow side letter rights to transfer. Often this will depend on the nature of the transfer and the rights involved. They may be more flexible for internal reorganizations (where beneficial ownership remains unchanged) but less inclined when ownership or control shifts.

If the GP is willing for the side letter to transfer, it is not uncommon for a confirmation to be added to the transfer agreement, rather than re-issuing the side letter.

Third party transfers

A transferee has no automatic right to receive the benefit of any side letter granted to the transferor.

GPs should generally resist new side letter requests from transferees, but may be willing to make limited accommodations where the transferee has certain specific tax, legal or regulatory requirements which would otherwise block it from investing in the fund. This may involve issuing a new side letter to the transferee or, more simply, accommodating such terms within the transfer agreement.

In order to avoid any issues under the MFN (see below), the GP will need to restrict such terms (whether in a side letter or the transfer agreement) to those already held by similarly situated investors.

Occasionally, a third-party transferee may already hold an interest in the fund through an affiliated entity and may request that the transferee also receive the benefit of any side letter held by the existing investor.

Again, this is at the GP’s discretion. Economic rights (e.g. fee discounts) are likely to be rejected, but more administrative rights may be accepted provided there is no additional burden on the GP.

A note on the MFN

One overarching point that GPs should keep in mind is the fund’s MFN (“most favored nations”) provision.

The MFN requires disclosure of all side letter terms and gives investors election rights, subject to commitment thresholds and carve-outs (e.g., investor-specific tax, legal, or regulatory rights are typically non-electable).

The MFN may be triggered if:

• A transferee receives a new side letter

• The GP agrees to substantive changes in the transfer documents that impact fund operations or alter the terms on which the transferee is investing (unless these terms already exist for similarly situated investors)

• To mitigate risk, GPs should ensure that any new side letter terms or transfer document amendments are drawn from existing side letters with similarly situated investors.

Striking a balance

The above are intended as suggestions only and we appreciate that different GPs will take different approaches to investor negotiation.

It goes without saying that any negotiation of the transfer documents must not open the fund, GP or existing investors to any risk (whether legal, tax, regulatory or reputational) or impose any additional administrative burden.

But outright refusal isn't always the answer. GPs can strike a balance between rejecting negotiation wholesale and looking to accommodate certain specific requests in the interests of developing a positive working relationship with the transfer parties.