On 6 April 2017, the UK Government updated the existing UK limited partnership regime with the creation of a new fund vehicle known as the "Private Fund Limited Partnership". The PFLP is a sub-category of limited partnership that is a more attractive proposition for both fund managers and investors than the existing UK limited partnership.
What the reform provides
Designation as a PFLP
To register as a PFLP, a UK limited partnership must:
- be constituted by written agreement; and
- qualify as a collective investment scheme for the purposes of section 235 of the Financial Services and Markets Act 2000 (FSMA), or would do so but for an exemption.
The new PFLP regime is voluntary and the changes will not apply unless the general partner elects to opt into the regime. A new UK limited partnership may make the designation on registration. Existing UK limited partnerships may also re-designate as PFLPs if they meet the conditions set out above and undertake the re-designation process.
Key Advantages of the PFLP Regime
Introduction of a "White List" of Permitted Activities
In a UK limited partnership, a limited partner retains limited liability so long as it does not participate in the management of the partnership's business. Very little guidance has been made available as to what constitutes taking part in management and this matter has always been open to interpretation. The PFLP regime introduces a non-exhaustive "white list" of activities that a limited partner of a PFLP may perform without being considered to be involved in management (and thereby jeopardising its limited liability). The "white list" includes such matters as: (a) taking part in decisions to vary or waive the terms of the partnership agreement; (b) consulting with or advising a general partner or the manager or adviser to the partnership about the partnership's affairs and/or its accounts; and (c) approving or authorising a general partner or the manager or adviser to the partnership to buy or sell investments.
Broadly speaking, the "white list" is consistent with equivalent safe harbour legislation in other popular investment funds jurisdictions and brings some much needed certainty to what has been a distinctly vague area of UK law. The "white list" makes a PFLP more appealing, in particular for separate account mandate and consortium arrangements, where investors expect to maintain a greater level of oversight over the operation of the partnership.
Capital Contribution Reforms
A standard UK limited partnership vehicle requires a limited partner to contribute capital to the partnership at the time of its admission to the partnership. To the extent that a limited partner withdraws some or all of that capital, it remains liable for the capital withdrawn in the event that the partnership requires it to meet liabilities. As a result, a limited partner in a standard UK limited partnership typically contributes only a nominal amount of capital on admission, with the balance of its funding provided by an interest-free loan to the partnership.
In contrast, a limited partner in a PFLP will not be required to make a capital contribution. The option for a limited partner to contribute capital to a PFLP will remain and, if capital is contributed, it may be withdrawn without further recourse by the PFLP. However, in relation to a capital contribution that has been made to a PFLP prior to its re-designation as a PFLP, the PFLP will continue to have recourse to a limited partner to the extent of any withdrawn capital.
As the market practice of splitting a limited partner's commitment into loan and capital will no longer be relevant for a PFLP, the reforms will simplify the form of documentation, admission process and the ongoing administration of a PFLP.
Reduction of Certain Administrative Burdens
There will be a simplified registration process for a PFLP, with a reduction in the amount of information that has to be included in an application for registration (or following a change in particulars) when compared with a standard UK limited partnership. The key change is that PFLPs will no longer have to register the amount of a limited partner's capital contribution on the public register. PFLPs will continue to be required to disclose the names of all limited partners admitted to the PFLP.
The transfer of an interest in a standard limited partnership by a limited partner must be published in the Gazette before it is of legal effect: that requirement will not apply to PFLPs. This deregulatory development is to be welcomed because, as well as being an administrative burden and an additional cost for the parties involved, the Gazette notice requirement causes uncertainty around when a transfer is effective.
We recommend that you undertake a review of any UK limited partnerships that you currently operate and consider if these should be re-designated to a PFLP. If a re-designation is deemed appropriate, engage in a dialogue with key stakeholders and determine steps to implement the re-designation. Likewise, if you are an investor in a UK limited partnership, you may wish to raise the issue of the re-designation with the general partner of the limited partnership.
If you are establishing a new UK limited partnership, apart from facing additional queries from prospective limited partners about the effects of a limited partnership being designated as a PFLP, we cannot see any significant disadvantages with private funds undertaking the PFLP designation and would therefore expect that the vast majority of future UK limited partnerships will be designated as a PFLP.