Private equity funds are typically established through the medium of limited partnerships and this overview therefore focuses upon the principal features, formation, regulation and taxation of limited partnerships for such purposes.
Many such limited partnerships are established under the laws of offshore jurisdictions, in particular, Jersey and Guernsey. It is, however, possible for the limited partnership to be established under the laws of an "onshore" jurisdiction (such as, Scotland, England or Delaware) and still have a general partner established in Jersey. In such cases, the "fund" is treated as being regulated in Jersey through its general partner, even though the place of registration of the limited partnership is in the relevant onshore jurisdiction. This type of hybrid structure can be of interest to limited partners not wishing to invest in a wholly "offshore" fund.
The remainder of this note will concentrate on Jersey limited partnerships and Jersey general partners. In addition to Jersey limited partnerships established under the Limited Partnerships (Jersey) Law 1994 (the "LP Law") for which the definition "Traditional LPs" is used in this note, it is now also possible to establish separate limited partnerships ("SLPs") and incorporated limited partnerships ("ILPs") under statutes which came into force in 2011, namely the Separate Limited Partnerships (Jersey) Law 2011 (the "SLP Law") and the Incorporated Limited Partnerships (Jersey) Law 2011 (the "ILP Law"). Accordingly, all three limited partnership options are available under Jersey Law as alternative legal structures for funds and the decision as to which option to follow will primarily be tax driven.
The table here shows a summary of the similarities and differences between Traditional LPs, SLPs and ILPs.
Jersey limited partnerships can be established for "any lawful purpose" and are required to have a written partnership agreement, although this is not publicly available. A declaration by the general partner must be filed with the Jersey Registrar of Limited Partnerships in accordance with the provisions of the relevant limited partnership law in order for the partnership to be established or, in the case of an ILP, incorporated.
As a matter of partnership law, there is no requirement to file details of the names of the limited partners or their capital contributions in the partnership declaration. Similarly, the nature of the activities and purpose of the limited partnership do not need to be disclosed in the declaration. There is no minimum capital requirement imposed on limited partners nor any restriction on withdrawing capital.
A Jersey limited partnership is required to set up a number of statutory records which should be maintained at its registered office. These records are private and may only be inspected and copied by partners.
Partnership accounting records must be maintained, although there is no requirement for partnership accounts to be audited unless this is required by the partnership agreement or the Jersey Financial Services Commission ("JFSC"). Partnership accounts may be drawn up in any currency.
Distinction between "public" and "private" funds
A distinction is made between public and private funds in Jersey. A private fund is one where, in summary, an "offer" for subscription or sale of units (for example, limited partnership interests) is made to an identifiable category of persons not exceeding fifty. This is typically known as a "private placement" fund. A fund which cannot meet the private placement criteria is, therefore, a public fund.
Private placement funds
Private placement funds require the consent of the JFSC under the Control of Borrowing (Jersey) Order 1958, as amended ("COBO"), for the creation of limited partnership interests. In assessing whether consent should be granted, the JFSC will have regard to the track record, relevant experience, reputation and financial resources of the promoting group wishing to establish the limited partnership. Save for this consent, there are no specific legislative requirements or regulatory guidelines governing the constitution, mode of operation or the investment restrictions applicable to a private fund established as a Jersey limited partnership. The JFSC normally confines its review of documentation for a COBO fund to the private placement memorandum to be issued in connection with the fund.
If a private placement fund fulfils the criteria for a "professional investor regulated scheme" ("PIRS"), its service providers (for example, its general partner) will benefit from a general exemption from regulation under the Financial Services (Jersey) Law 1998, as amended ("FSJ Law"), in relation to investment business and trust company business services provided to that fund. A professional investor regulated scheme is one in which each investor makes a minimum subscription of £250,000 (or foreign currency equivalent) or is a "professional investor" (as defined in the Financial Services (Investment Business (Restricted Investment Business – Exemption)) (Jersey) Order 2001) and receives and signs an investment warning in the prescribed form. This exemption will also extend to Jersey service providers of private funds established outside of Jersey if a register of interests is to be kept in Jersey and consent under COBO has been granted for this purpose.
Public funds can be divided into two categories, namely, collective investment funds authorised under the Collective Investment Funds (Jersey) Law 1988, as amended (the "CIF Law") and unregulated funds which, notwithstanding that they are public funds, benefit from the Collective Investment Funds (Unregulated Funds) (Jersey) Order 2008, as amended ("Unregulated Funds Order"), which contains specific exemptions for those public funds which would otherwise be collective investment funds for Jersey regulatory purposes which are, nevertheless, eligible for classification as "Unregulated Funds".
- Collective investment funds ("CIFs")
Funds which are offered to more than fifty potential investors require the following consents:
- under COBO for the circulation of any offer document;
- under the CIF Law;
- under the FSJ Law, in respect of any relevant service provider of the fund operating from or incorporated in Jersey.
The principal requirement under the CIF Law is that the fund itself (where the fund is a company), or the general partner (where the fund is a limited partnership) or the trustee (where the fund is a unit trust) will require a fund certificate, issued by the JFSC. In determining whether to grant a fund certificate, the JFSC will have regard to much the same considerations as under COBO and will usually attach conditions to the fund certificate (for example, that principal agreements may not be amended without the consent of the JFSC and accounts should be filed with the JFSC). The JFSC will also review any prospectus issued in relation to the CIF. Such funds are also required to appoint an auditor in Jersey.
- Expert Funds
There is, however, a sub-category of CIFs, which are established in accordance with the Jersey Expert Fund Guide ("Expert Funds"). The Jersey Expert Fund Guide provides for a minimum investment requirement and minimum net wealth declaration in order for investors to be classified as "Expert Investors". In the case of Expert Funds, the JFSC applies a lighter regulatory touch and does not need to review the constitutional and primary fund documents, as would be the case for a full CIF.
Nevertheless, in the case of all CIFs, whether Expert Fund or not, each Jersey-based functionary of such a fund must be licensed to conduct the relevant category of fund services business pursuant to the FSJ Law. This is a separate licensing regime applicable to service providers. Licences issued pursuant to the FSJ Law attach conditions and registered persons under that law are required to comply with those conditions and, in addition, are required comply with the Codes of Practice issued by the JFSC for fund services businesses ("FSB Codes").
- Unregulated CIFs
As previously stated, unregulated funds are funds which, but for the specific exemption contained in the Unregulated Funds Order, would otherwise be CIFs for Jersey regulatory purposes ("Unregulated Funds").
There are two categories of Unregulated Funds, namely:
- unregulated eligible investor funds (where each investor must qualify under one of the eligibility criteria contained in the Unregulated Funds Order ("Unregulated Eligible Investor Funds")); and
- unregulated exchange-traded funds (where the fund must be admitted to listing on one of the recognised stock exchanges or markets listed in the Unregulated Funds Order within 90 days of notification of the establishment of the fund being given to the Registrar of Companies in Jersey).
Unregulated Funds do not require certification under the CIF Law and the JFSC will not review any of the primary fund documents or the prospectus issued in relation to such funds.
An Unregulated Fund which is a limited partnership must have a Jersey-based general partner. However, by virtue of statutory exemption, the general partner of an Unregulated Fund does not need to obtain a licence pursuant to the FSJ Law to conduct fund services business. However, other entities in Jersey providing services to the Unregulated Fund (such as an administrator or, where appropriate, a custodian) must be licensed to provide the relevant category of fund services business and will be required to comply with the conditions set out in that licence as well as the FSB Codes.
The table here shows a summary of Jersey investment fund regulatory classifications.
Whether the fund is a private placement fund or a public fund (of any category), there are no prescribed rules relating to the contents of a prospectus or placement memorandum to be issued in relation to a limited partnership, unless the fund is an Expert Fund, in which case, certain limited disclosure requirements are applicable.
The JFSC will, however, save in the case of an Unregulated Fund, review any such prospectus or private placement memorandum prior to granting the relevant regulatory consent and will expect to see a disclosure of the principal persons and entities which will provide services to the limited partnership, as well as a clear statement of the investment policy and investment and borrowing restrictions to be followed, details of all fees and charges to be borne by the fund, and a disclosure of any material risks or other material considerations.
An investment warning in a prescribed form must be included in any prospectus issued in relation to an Expert Fund or an Unregulated Fund and investors in such funds are required to acknowledge and sign a declaration in the prescribed form.
For the purpose of Jersey tax laws, Traditional LPs, SLPs and ILPs are not assessable to Jersey income tax. As a result of investing in a Traditional LP, an SLP or an ILP, non Jersey resident partners will not be liable to Jersey income tax other than in respect of certain Jersey source income (excluding interest on Jersey bank deposits), which generally means that no Jersey tax will be payable by non Jersey resident limited partners. Whilst tax advice should always be sought, it is anticipated that Traditional LPs and SLPs will be treated as transparent for the purpose of UK income tax, capital gains tax, corporation tax and stamp duty land tax. UK tax counsel opinion issued in connection with the preparation of the ILP Law indicates that ILPs are likely to be treated as transparent for the purpose of UK income tax, corporation tax and stamp duty land tax but, in contrast to Traditional LPs and SLPs, opaque for the purpose of UK capital gains tax.