Liquidity Illusions: How LPA “Transfer” Language Restricts Secondary Sales

>> This year has marked the most disruptive stretch in markets since the onset of COVID in March 2020. If you found yourself reaching for your closed-end fund documents to double-check terms and conditions, you weren’t alone. On April 7, the Financial Times reported that institutional investors were looking to offload hundreds of millions in private fund commitments they feared were poorly positioned for the volatility ahead.

But allocators who turned to their LPAs in search of an exit were likely in for a rude awakening. Exiting a private fund remains one of the hardest things an allocator can do—even though there’s little principled justification for the broad contractual rights sponsors retain to obstruct secondary sales.

DocsDiligence routinely reviews LPA transfer provisions that govern secondary sales. The excerpt below is a typical variant from a sponsor backed by sophisticated counsel. The language is dense and deliberately crafted to preserve the sponsor’s ability to restrict liquidity—but we’ll unpack it for you in plain English.

Key Transfers Provision:

8.2 Transfer. (a) Conditions to Transfer. (i) No sale, exchange, transfer, assignment or other disposition (collectively referred to as a "Transfer") of all or any fraction of a Limited Partner's interest in the Partnership may be made without ...

In our full writeup, we look at the extended Key Transfer Provision, as well as:

Why “Not to Be Unreasonably Withheld” Isn’t Enough: “Best Interests of the Partnership”

Conditions and Hurdles Buried in Clause (ii)

Even If You Clear the Gauntlet—You're Still Not Out

Key Takeaways

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