In our previous Funds Update edition in June, we set out the key benefits and conditions of the new private fund limited partnership (PFLP) regime, which came into force on 6 April 2017. It is now nearly 6 months since PFLPs were introduced, and in this article we provide a brief update on the popularity of PFLPs, as well as outlining one issue which is yet to be resolved. In summary, while there is evidence of PFLPs being established, in our view the new regime is yet to have a major impact within the funds industry.
Use of PFLPs
According to Companies House records, for the period from 1 April 2017 to 31 August 2017, 71 new PFLPs have been registered in England and Scotland compared to 2,064 traditional limited partnerships , and only 63 Forms LP8 have been filed to designate existing LPs as PFLPs. This confirms the view expressed in our previous article: that there has been some uptake in the industry in respect of both using the new regime to establish PFLPs and in re-designating existing LPs, but it is not yet significant overall. In our experience, whilst some potential investors are asking about PFLP status during their due diligence process, this is not yet a key issue with investors generally. Companies House does not publish any data regarding the nature of the partnerships still being established as LPs so it is difficult to tell the reason why the large majority are still being registered in this way.
As we discussed in June 2017, the MOU, which is traditionally relied on by managers of private equity style funds to ensure they are taxed at capital gains rates on their carried interest (subject now to the holding period rules introduced in 2016), assumes that investors’ commitments will be split between loan (99.99%) and capital (0.01%) and that the fund’s carried interest partner pays 20% of capital contributions. Although the MOU does recognise that other structures are available, the cautious approach has often been to mirror this loan/capital split in order to ensure strict compliance with the MOU, even where not otherwise required (e.g. in a non-UK based partnership with UK tax paying carryholders).
Accordingly, although a loan/capital split is no longer required in respect of PFLPs, cautious fund managers continue to retain the traditional split in their PFLP documentation, in order to ensure that the carried interest partner remains in strict compliance with the MOU in the absence of any further HMRC communications on this point.
This does counteract some of the intended simplicity of the PFLP regime and guidance from HMRC, confirming that the split is not necessary for the purposes of honouring the MOU, would be welcome. However, the obligation to publicise an LP’s capital contributions does not apply to PFLPs, so there are still benefits to registering under the new regime, even if the loan/capital split is retained in the partnership’s internal documents.