Internal transfers are more efficient

Transferring a limited partner fund interest internally is much more efficient to process than an external purchase, although the protocol is generally the same, according to Nicholas Holman, co-head of the investment fund group at law firm Hogan Lovells.

“As investors in an internal transfer are related in some way, documentation of the agreement between them is much more relaxed. Although the GP is often more relaxed as well, the same documentation is required as in an external transaction, as a means of protection for both the GP and the other investors in the fund.”  

Internal transfers occur in the secondaries market for many different reasons, such as an employee leaving, moving to a new jurisdiction or passing stakes to another family member through inheritance. Personal interests are another fundamental reason behind internal transfers, which makes it difficult to track company progress when the transfer comes from within.

Other types of transfers can include firms moving assets around in anticipation of a sale or a ‘corporate clean-up’, where different subsidiaries are merged and the originals are dissolved to effectively ‘clean-up’ any empty remaining funds , one US based lawyer explained. 

For example, earlier this month, Chilean electrical sustainability group Mediterráneo SA transferred its stake in Ardian’s sixth secondaries fund (ASF VI) to its family office counter-part Bancard International Investment, UK regulatory filings disclosed. Both Mediterráneo and Bancard declined to comment but a source familiar with the matter confirmed the transfer was internal and the two parties are connected.

Hogan Lovells deals with internal transfers about once a quarter, according to Holman. These requests often relate to closed-ended funds, where a client wants to realise cash or settle his or her relationship and needs to find a replacement investor to purchase the asset.

For these reasons, most firms choose not to publicly acknowledge internal transfers as they are concerned about how the transfer volume in the fund will be perceived externally, and worried about what effect publicity will have on future fundraising, the US-based lawyer added.

Despite reasons for internal transfers and their frequency, legally speaking, these internal transfers are set up the same way as an external secondary sale yet they are often not included when counting secondaries volume.