The UK has introduced legislative changes that could reinvigorate the use of partnerships for private funds in the UK. The Legislative Reform (Private Fund Limited Partnerships) Order 20171 (Order), which introduces the concept of a private fund limited partnership (PFLP), came into force on 6 April 2017, with the aim of modernising the partnership structure in the private fund context.
Until the Order was introduced, there had been only one form of limited partnership available in England and Scotland, which was governed by the (practically outdated) Partnership Act 1890 (1890 Act), the Limited Partnerships Act 1907 (1907 Act) and common law. This structure had fallen behind those in other jurisdictions offering a limited partnership model (such as Jersey, Guernsey, Luxembourg, Delaware and the Cayman Islands) in terms of being a practical, user-friendly option. The PFLP regime eliminates some of the peculiarities and reduces many of the administrative burdens associated with structuring a private fund as an English limited partnership (or a Scottish limited partnership, which differs from an English limited partnership notably in having the ability to have legal personality) and increases the UK’s competitiveness in the funds market.
The Order has been a long time coming – there have been repeated attempts to reform the legislation over the years (the latest in 2013), and the Order was nearly delayed further when the UK Regulatory Reform Committee recommended that the government postpone the draft Order. The PFLP is now available to managers looking for a practical option in the UK.
Application of the Regime
Provided it satisfies the eligibility criteria, a new limited partnership can now (but need not if the older form of limited partnership is desired) be formed as a PFLP, or an existing limited partnership can elect to be designated as a PFLP.2 To be eligible, a partnership must be constituted by written agreement and be a “collective investment scheme” under section 235 of Financial Services and Markets Act 2000. Most investment funds should be able to meet these requirements, although certain investment arrangements (e.g., certain club deals) may fail because they do not qualify as a collective investment scheme. Once designated as a PFLP, a partnership cannot opt out of the regime.
Key Features of the PFLP
Set out below are key changes to the English/Scottish limited partnership regime introduced for PFLPs.
Introduction of a “White List”
An important aspect of investing in a limited partnership is that a limited partner’s liability is limited to its capital contribution. The 1907 Act placed this on a statutory basis so long as the limited partner is “not taking part in the management of the partnership business”.3 To provide limited partners with guidance as to what are permissible activities in respect of a PFLP, the Order introduces a “white list” of activities that limited partners in a PFLP can undertake without losing their limited liability status (provided such activities are allowed under the relevant limited partnership agreement). The list is non-exhaustive and covers many of the activities commonly undertaken by limited partners under a limited partnership agreement (e.g., serving on a limited partner advisory committee or taking part in a decision about varying the terms of the limited partnership agreement). Significantly, the white list introduces a safe harbour for members and employees of a manager who are themselves investing in a PFLP as part of the general partner commitment (or similar arrangement). This approach is consistent with that taken in many of the jurisdictions in which limited partnerships are used in a funds context.
The white list cannot be relied on to provide similar comfort for limited partners in a limited partnership that is not a PFLP.
Changes to Capital Contribution Requirements
The 1907 Act requires limited partners to make capital contributions to the limited partnership for which the limited partner is liable until the end of the life of the partnership (even if that limited partner has withdrawn from the partnership). As a result, the market practice in the private fund industry has been to utilise a “loan capital split”, whereby a limited partner makes a small capital contribution to the partnership, with the bulk of the partner’s commitment being advanced as an interest-free loan. This practice is no longer necessary for limited partners in PFLPs formed on or after 6 April 2017, as (i) they are not required to make a capital contribution and (ii) the requirement to return any capital contributions withdrawn prior to the end of the life of the partnership does not apply.4 For PFLPs registered before 6 April 2017, limited partnerships formed prior to this date will continue to be subject to the previous regime.
It is therefore anticipated that going forward PFLPs will operate in the same way as limited partnerships formed in comparable jurisdictions, by allowing capital contributions to be made over time in response to periodic draw-down requests.
Reduced Limited Partner Duties
Certain duties applicable to partners under the 1890 Act have been disapplied automatically for limited partners in a PFLP – for example, a limited partner in a PFLP does not have a duty to render accounts and information to other partners or a duty to account for profits made in competing businesses. This is a welcome change in the private fund context, where these duties are unlikely to align well for passive limited partners who may make investments in multiple funds which may be pursuing similar investment objectives and strategies.
Removal of Certain Administrative Requirements
The Order has also taken the opportunity to remove some of the more cumbersome and outdated administrative requirements, including those with respect to:
- Notice of Assignment. The PFLP regime removes the requirement to publish a notice in the Gazette where a limited partner assigns its interest in a PFLP to another party (however, notice of the removal of a general partner or a general partner becoming a limited partner will still need to be published).
- Winding-up. Limited partners may agree among themselves as to who will wind up the PFLP without the time and expense of seeking a court order (other UK limited partnerships require a court order where a general partner is not able to effect the winding-up).
- Disclosure. PFLPs are required to disclose less information than other limited partnerships, both upon registration and during their life. For instance, PFLPs do not need to register or update details of the nature of the partnership’s business or, as mentioned above, a limited partner’s capital contribution.
Other Points of Note
The PFLP does not offer any differences in tax treatment as compared to the existing English (and Scottish) limited partnership regimes.
The PLFP regime does not allow for limited partnerships outside of Scotland to elect to have legal personality. Giving English limited partnerships the option to elect to have separate legal personality (as is possible in certain other jurisdictions) would have been an opportunity to further simplify the structure and offer greater opportunity in an onshore funds context (as a PFLP with legal personality would have been able to enter into contracts on its own behalf and commence litigation and hold assets in its own name).
The introduction of the new PFLP regime, and its accompanying changes to the limited partnership legislation under the 1907 Act and the 1890 Act, goes a long way to address issues with the existing limited partnership regime. While time will tell how popular the structure is, it should be considered a modern, user-friendly option, which should make the UK a more attractive domicile for private funds in the coming years. This is likely to be particularly relevant as the UK looks generally at its domestic funds regimes in a post-Brexit world.