The rising legal fees for what some describe as a “copy and paste” document, while others describe it as a complex contract akin to underwriting a new fund, are causing frustration among private market participants, with LPs ultimately footing the bill.

Transfer agreements are legal documents that effect the sale of an interest in a limited partnership from an existing limited partnership to a new limited partnership. In many cases, the new limited partnership is a secondary purchaser.

These documents are typically 15 to 25 pages long and include the date on which the selling LP relinquishes its responsibilities and benefits with respect to the fund – and the date on which the new LP takes over – as well as other administrative information such as the amount of committed capital and unfunded obligations.

Sources tell Secondary investor that the cost of these documents was typically between $5,000 and $10,000 for a single fund share transfer. However, this price has skyrocketed in recent years, with the average cost rising to $15,000 to $20,000 and sometimes as high as $60,000 to $80,000. At least three sources report Secondary investor They have seen law firms charge over $100,000 for a single transfer agreement.

“Many law firms have discovered it as a kind of gold mine,” says the co-head of private capital advice at an investment bank that advises on trading in second-hand limited partnership fund shares. “Transfer agreements are pretty standardized. Ultimately, it’s just a copy-and-paste job. Once the agreement is in place, you can use it for any transfer.” Often, it’s paralegals and associates, not senior partners, who handle these documents, the co-head adds.

Secondary investor We contacted 50 large and small law firms with private markets practices and asked them how much they charge for transfer agreements. The eight firms that responded reported that the cost of a single transfer ranged from $1,600 to $50,000. Two reported that they had seen other law firms charge $50,000, $65,000 and $100,000 for single transfers.

“We work on thousands of GP referrals and as a result have received invoices from many law firms,” ​​says Adam Tope, co-head of secondary law at DLA Piper. “It is rarely a flat fee. It is almost always the actual costs incurred. We have seen a spike in costs recently.”

Those who argue against the rising costs of transfer agreements say that there is rarely a wide range of legal issues to negotiate because most transfer agreements are similar. They point out that transfer agreements have become a money-making machine for law firms that find themselves in the role of a disinterested third party.

Some law firms have set up special departments to review transfer agreements. Simpson Thacher & Bartlett – the second most active law firm in fund formation, after subsidiaries Private Equity International‘s Fund Formation League Table – has dedicated client teams, permanent lawyers and paralegals within those teams who focus primarily on transfers, a spokesperson for the firm confirmed to Secondary investor.

It is unclear whether other law firms have similar dedicated features.

In the case of a law firm representing a fund, its client is the fund’s sponsor. However, the client is not involved in the transfer transaction, nor does it pay the law firm for specific legal advice related to the transfer. Transfer agreement fees are typically split 50/50 between the selling LP and the new buyer, who may each have their own legal counsel and are also not clients of the fund adviser. Therefore, the fund adviser is in a position where it can charge whatever it wants to execute a transfer agreement, with no real oversight from its client and no accountability — either legal or ethical — to the selling or buying LPs, sources report. Secondary investor.

“If you want to buy shares in a private company, you fill out a one-page A4 share transfer form. If you want to transfer an LP share, you sign a bespoke 25-page document with negotiated terms. Why is a form of security so much more associated with lawyers?” asks Gabriel Boghossian, a partner at law firm Stephenson Harwood, which advises clients on LP portfolio deals and does not represent sponsors in transfers.

He points out that transfer agreements have become akin to “last-mile” fees, which are unreasonable or higher-than-expected costs in the final phase of a project that must be paid in order for the entire project to be completed.

“They have you in the palm of their hand,” says Boghossian, noting that the short time frame within which many sellers and buyers seek to complete LP transfer transactions to take a fund position off or on their books means the law firm representing the fund can charge as much as it wants.

“If you don’t pay the referral fees to the GP’s legal counsel, your deal won’t go through,” says Boghossian. “It’s a prerequisite or a condition precedent to closing. Usually you enter into this referral agreement just before closing, but the more you negotiate, the more the price goes up.”

“We certainly have several customers who are pushing harder and wanting to know what it will cost and asking for fair warning if things escalate.”

Increasing complexity

Others argue that the rising costs are justified and reflect the increasing complexity of transfer arrangements.

“Costs vary widely and depend on many factors, such as the comments raised and the amount of back and forth, how involved the Know Your Customer process is, whether tax withholdings are involved, whether the buyer requests a side letter and how the GP handles transfers, among other factors,” noted one of the law firms in a response to Secondary investor‘s range.

The amount of work involved in even a so-called “simple” transfer can be very laborious. Generally, it is the lawyer’s responsibility to ensure that the transfer complies with the partnership agreement and applicable laws, sources say. Secondary investorIn addition to the increased complexity of anti-money laundering and customer identity controls around the world in recent years, sources say taxes and compliance with the US Employee Retirement Income Security Act of 1974 will also result in higher costs for third parties responsible for such compliance measures – typically law firms and/or fund administrators.

This complexity can be particularly acute when a transfer is made from a particular fund for the first time, as the transfer agreement documents have to be prepared from scratch, which incurs costs.

“I don’t know of any law firm that makes money or even breaks even on transfers,” says Sean Hill, a partner at Kirkland & Ellis. “The transferring parties always think the costs are too high, but I doubt any firm actually takes on all the time that is allocated to transfers. The amount of basic work required is the same whether the LP’s interest being transferred is $500,000 or $50 million.

“From a market perspective, I think everyone wants the time and costs involved in processing transfers to be reduced: GPs, buyers and sellers, and legal advisors for all of these parties. No one seems to have found a solution to streamline the process, and everyone would like an app to process transfers more efficiently. Costs are definitely increasing, but that is partly because pre-transfer due diligence by sellers and buyers is much more extensive than it used to be, and general regulatory compliance, particularly in the areas of tax and anti-money laundering, is more intense.”

Any request from a clerk for a certified copy of a driver’s license or utility bill comes through the legal counsel, Hill says. “The time spent adds up quickly, even if it only takes a few minutes to coordinate with the relevant authorities.”

Impact on price

The cost sharing nature of transfer agreements means that any increase in fees is borne by both the buyer and the seller and is value-reducing for both parties. An LP will receive less money back when it sells its interest in a private markets fund, and the buyer – such as a secondary fund and its underlying LPs – will receive a lower return.

Sources tell Secondary investor that the costs of transfer arrangements have not historically been high enough to significantly impact returns for buyers or sellers. However, when these costs rise, they can impact prices and returns. An LP portfolio sale worth $20 million in net asset value, involving 30 fund units and attracting transfer fees of $500,000, can be problematic for a seller sensitive to net price, according to a London-based consultant with experience in selling mature secondary properties.

Several sources have said Secondary investor that in cases where the transfer costs were considered unreasonably high, they have requested a reduction in fees – often successfully.

Legal panacea?

A lack of standardization in the private markets industry means that each sponsor can have its own preferred transfer agreement template, making the processes more complicated and less efficient for buyers and sellers. Sources note that a sponsor can even have different transfer agreement templates for its different fund families, making the process even more complicated when an LP sells exposure to multiple funds with different strategies from the same GP.

Of the law firms that responded Secondary investorAll requests for comment noted that costs vary widely depending on different circumstances, with some firms charging a set fee for “routine form submissions” while others charge based on the attorney’s time.

Unless the industry can agree on a standardised form, transfer agreements will continue to be ad hoc in nature and fund sponsors will prefer to use templates that serve their own internal purposes.

“Someone has to say we need to fix this and bring the heads of the five families to the table,” says a US partner at a global law firm. “How do we solve the problem? Can we solve it?”

— Silas Sloan and Madeleine Farman contributed to this report