Introduction
A limited partnership interest can be sold in two halves, and the law treats them differently. Under Delaware's partnership statute, the basis of many US private equity funds, an assignment carries the right to share in profits and receive distributions, but it does not make the buyer a partner. Membership, with its votes, reports and obligations to the fund, comes only through admission, and the limited partnership agreement (LPA) usually reserves that decision to the general partner (GP).
Three documents bridge the gap. The LPA sets the conditions a buyer must meet, the purchase and sale agreement (PSA) allocates price and risk between seller and buyer, and a three-party transfer agreement records the GP's consent and the buyer's admission. The private capital advisory (PCA) banker drafts none of them, yet the timetable, closing certainty, and what the seller still owes afterwards depend on how they fit together.
How a Fund Interest Legally Changes Hands
Assignment Versus Admission
Delaware's Revised Uniform Limited Partnership Act spells out the split. An assignee receives the distributions and allocations the seller would have received, but the assignment does not entitle it "to become or to exercise any rights or powers of a partner". It becomes a limited partner only as the partnership agreement provides or, failing that, with every partner's consent. An institutional buyer paying for an interest wants the votes and information rights that come with membership, not a bare cash stream.
Fund documents therefore route every sale through admission. The model LPA of the Institutional Limited Partners Association (ILPA) admits a buyer once the fund and GP accept its subscription agreement, lists it on the register of partners, and voids any transfer made outside its transfer article, which is mapped with the other relevant clauses in the limited partnership agreement article.
- Substitute Limited Partner
A buyer of a fund interest that the general partner has admitted as a limited partner in place of the seller. It succeeds to the seller's rights and obligations for that interest, including the unfunded commitment, whereas an assignee that is not admitted holds only the economic rights.
What the Seller Is Not Released From
Admission does not wipe the seller's slate. The same Delaware provision states that, whether or not the assignee becomes a limited partner, the assignor is not released from its liability to the partnership for contributions and distributions. Sellers commonly ask the GP for a release in the transfer agreement, and GPs with leverage resist; whatever is not released must be allocated in the PSA.
Why GPs Insist on Approving the Buyer
The Tax Test: Publicly Traded Partnership Rules
The GP sells nothing in an LP-led sale, yet it can block one, because the fund's legal status depends on who its partners are. A fund taxed as a partnership risks corporate tax if its interests become readily tradable under the Treasury regulations on publicly traded partnerships. The private placement safe harbour covers a partnership with no more than 100 partners, which is why the ILPA model requires a buyer to count as one partner under that rule. Larger funds lean on the lack of actual trading safe harbour: transfers in the tax year, excluding private transfers such as those at death or qualifying block transfers, must not exceed 2% of capital or profits. A partnership counts as involved in a secondary market only if it admits the transferee or otherwise recognizes its rights, so consent is the GP's control over that count.
Securities Status, Plan Assets, and Knowing the Buyer
Three other status tests run through the same door:
- Investment Company Act: a section 3(c)(7) fund must be owned exclusively by qualified purchasers, judged when each holder acquires its interest; a 3(c)(1) fund is capped at 100 beneficial owners.
- Plan assets: under the Employee Retirement Income Security Act (ERISA) regulation, benefit plan investors become significant at 25% of any class of equity, tested after each acquisition, so a fund below that line checks every buyer.
- Identity and sanctions: the ILPA model requires confirmation of the buyer's identity, and GPs run know-your-customer (KYC) and sanctions checks; the Financial Crimes Enforcement Network (FinCEN) has deferred its anti-money laundering rule for US advisers to January 1, 2028.
Discretion, Costs, and the GP's Own Preferences
In the ILPA model, consent may not be unreasonably withheld once a buyer meets the conditions; the GP may request further documents and legal opinions, and the seller or buyer pays the fund's reasonable expenses even if the transfer fails. Many market LPAs give the GP sole discretion instead. A January 2026 Hogan Lovells Cadwalader note on GP consent describes GPs citing reputational risk and using a right of first refusal (ROFR) or their discretion to steer sales toward a preferred buyer, sometimes one that also commits to a new fund or continuation vehicle, the linkage behind stapled secondaries.
A ROFR is mainly a timing problem: it can only be offered once price and terms exist, so it usually runs between signing and closing, and the winner learns only then whether it bought that fund.
What the Purchase and Sale Agreement Covers
The PSA is a two-party contract: the GP signs none of it. It sells the named interests from an effective date, normally the reference date, at a percentage of net asset value (NAV) adjusted for later calls and distributions, a mechanism close to the locked box in company sales and worked through in pricing LP interests.
Blocked interests and the long-stop date are covered in the LP portfolio sale process, and security for a deferred price in deferred payments. The full agreement reads as a sequence of allocations:
| PSA section | What it settles | Where negotiation concentrates |
|---|---|---|
| Sale and price | Interests, effective date, adjustments | Late or recallable cash flows |
| Seller representations | Title, authority, capital account figures | Knowledge qualifiers, survival |
| Buyer representations | Investor status, authority, funds | Match with the GP's conditions |
| Covenants | Seller conduct before closing | Funding calls, passing on notices |
| Conditions | GP consents, transfer documents | Share of the portfolio that must close |
| Termination | Long-stop date, uncured breach | Extension rights |
| Obligations | Assumed versus excluded | Givebacks, pre-closing tax |
| Indemnities | Recovery for breaches, excluded items | Caps and survival periods |
| Confidentiality | Fund information, announcements | A public seller's disclosure duties |
Representations, Survival, and Indemnities
Seller representations are narrow because the seller does not run the fund: it owns the interest free of liens, may sell it, is not in default, and has reported its cash flows accurately. Unlike a company sale, where representations, warranties and indemnification cover the business itself, nothing is warranted about the portfolio companies. Buyer representations mirror the GP's conditions.
A public filing shows the structure at work. A 2007 proxy statement shows Excelsior Private Equity Fund II, a business development company, seeking approval to sell its 17 holdings, mostly LP interests in venture and buyout funds, to AIG PineStar Capital II.
A seller winding down, as Excelsior was, needs its exposure to end so it can distribute cash; a buyer wants title protected for as long as it owns the interest.
Assumed Obligations, Excluded Obligations, and LP Givebacks
The buyer assumes the interest's obligations from the effective date, above all the unfunded commitment and recallable distributions. Excluded obligations stay with the seller, typically pre-closing liabilities such as its own taxes or breaches of its subscription documents and side letters, backed by its indemnity. The item most in need of explicit drafting is the LP giveback.
- Limited Partner Giveback
An LPA obligation requiring limited partners to return distributions they received so the fund can meet liabilities, typically indemnification of the GP and manager. It is usually capped and time-limited, and it is distinct from the GP clawback, which returns excess carried interest to the limited partners.
The ILPA Model LPA caps each LP's giveback at the lesser of 30% of distributions received and 25% of commitment, both bracketed, and ends it at the earlier of two years after the distribution or two years after the fund's term, unless a proceeding is pending; Delaware limits statutory liability for a distribution to three years unless otherwise agreed. A giveback can reach cash the seller received before the sale while the notice goes to the buyer, now the partner of record, so the PSA must say who pays. The GP-side mirror, the carry clawback, is covered in European versus American waterfalls.
Closing: Signatures, the Register, and Cash
Once consents are in, closing is administrative, but the GP's signature is the one everything else waits for. For each fund:
Buyer onboarding
The buyer delivers subscription documents, certifications and KYC information; the seller its tax certification.
Transfer agreement
Seller, buyer and GP sign, recording consent, admission and any seller release.
Closing statement
The parties agree the price adjusted for cash flows since the effective date.
Cash settlement
The buyer pays the seller, net of any withholding, on the transfer date.
Register and notices
The GP updates the register; the administrator redirects notices, distributions and reports.
The step-two document, defined in the PCA ecosystem article, is drafted by GP counsel on the GP's own form, so buyers already holding a manager's funds tend to clear it fastest.
The cash moves on one day, but the sale does not end on it. The seller's exposure has a legal tail: representations surviving up to 18 months in the Excelsior agreement, a two-year giveback window per distribution in the ILPA model, three years under the Delaware statute, and, without a release, the assignor's residual liability. A selling committee asks what it will receive at closing; the fuller answer also dates its last obligation to the fund.
