PTP makes secondaries trades much more taxing

If you are starting to get a little churn among your investor base, then you should be thinking about your fund's status.

Secondaries trading among limited partners has become part of private equity life; this may be problematic from a tax perspective. Long known about, but apparently rarely given much thought, is the risk of a fund unintentionally becoming a publicly traded partnership – or PTP – because of “trading” by its limited partners selling out of it.

Funds want to avoid this, with all the tax obligations it brings; this note from law firm Morgan Lewis has details on how.

Now, according to one secondaries adviser, a record number of PE funds have reached the annual limit to the amount of LP transfers they can accommodate without becoming a PTP. Rather than change their corporate status, these funds will inevitably just withold consent for LP transfer requests for until sufficient time has passed. Sales can be delayed by up to 18 months, we hear. While this may not be technically problematic from a GP’s perspective, it is, in the words of Secondaries Investor‘s Rod James, “hardly a recipe for goodwill.”

Next week we will be launching our deep dive into GP-led secondaries processes: a must-read for anyone thinking of giving their investors some liquidity. Stay tuned!

Email prepared by Toby Mitchenall.