The government recently consulted on proposed changes to the Limited Partnerships Act 1907 (the “LPA 1907”) and the Legislative Reform (Private Fund Limited Partnerships) Order 2017 (“LRO”) implementing those changes came into force on 6 April 2017. With this comes the introduction of a new subcategory of limited partnership, the ‘private fund limited partnership’ (“PFLP”), which seeks to modernise the regime that has existed for more than a century under the LPA 1907.
Given that most, if not all, English limited partnerships (“English LP”) used for private funds, joint ventures and other forms of co-investment will satisfy the requirements to qualify as a PFLP, the new PFLP regime will be highly relevant for any private equity, venture capital or similar co-investment structure.
We expect these changes to further cement the English LP, already one of the most common investment vehicles in European real estate private equity, as one of the most attractive and flexible choices of fund vehicle, improving its competitiveness against other jurisdictions.
Qualifying as a PFLP
(i) is an English LP constituted by agreement; and
(ii) satisfies all the elements of a “collective investment scheme” under the Financial Services and Markets Act 2000 (ignoring any exemptions).
New and existing English LPs can be registered as PFLPs, provided they fulfil the criteria (set out above) and their general partner completes and submits the relevant application (Form LP7 for new English LPs and Form LP8 for existing English LPs). It is likely that partnership agreements of existing English LPs will require updating to correspond with registration as a PFLP.
It should also be noted that an English LP that becomes a PFLP will not be able to return to its limited partnership status.
What are the key changes?
1. White list
Currently: Where a limited partner takes part in the management of the partnership business, it will lose its limited liability.
Changes: The LRO introduces a “white list,” a non-exhaustive list of permitted activities that a limited partner in a PFLP may undertake without losing its limited liability. These activities include:
- participating in a decision about a change in the general nature of the partnership’s business, a change to the partnership documents, a disposal of the business or its dissolution;
- taking part in certain investment decisions and decisions related to partnership borrowings;
- taking part in a decision that involves an actual or potential conflict of interest relating to the partnership, its business, a partner in the partnership or a person appointed to manage or advise the partnership;
- acting as a director, member, employee, officer or shareholder in a general partner or another person appointed to advise or manage the partnership;
- consulting/advising with the general partner or the manager about the affairs of the partnership; and
- appointing/nominating a representative to a committee.
The full white list is available here.
Comment: Perhaps the most beneficial of all the changes, the white list is intended to provide investors with clarity and comfort that they can have oversight over investments and approve proposals by the general partner without losing limited liability status. The LRO is also clear that the white list itself does not create any adverse presumptions for limited partners in other limited partnerships. The white list is not, however, intended to enable limited partners to take part in the management of the business. It is worth noting that whether such white list items are ultimately included in the PFLP partnership agreement will need to be agreed between the general partner and limited partners.
2. Capital contributions
Currently: Limited partners must contribute capital to the partnership and will not be liable for debts beyond such contributed amounts. They are also prohibited from withdrawing their capital until such time as the fund is wound up. In light of this, limited partners typically seek to contribute a nominal capital sum with the balance contributed by way of loan. This structure enables the limited partnership to return amounts to limited partners as repayment of loan and distributions of profits without breaching the LPA 1907, rather than having to wait until the fund is wound up.
Changes: A limited partner in a PFLP is no longer under an obligation to contribute capital and is not liable for debts beyond the partnership capital available to meet such debts. In addition, a limited partner in a PFLP registered on or after 6 April 2017, will be permitted to withdraw or receive back its capital contribution and will not be liable for debts and obligations to the amount withdrawn/received back.
A limited partner in an English LP that has been designated a PFLP will only be able to withdraw/receive capital contributions made on or after 6 April 2017 without liability, but will be unable to withdraw/receive back its capital contributions made before this date, and will remain liable in respect of such amounts.
Comment: This will allow limited partners in a PFLP to contribute their entire commitment by way of loan (no material difference to the current position in practice). Notwithstanding that limited partners in a PFLP are able to withdraw or receive back their capital contributions, commercially investors may still prefer to contribute their commitment by way of loan. In the case of a general partner, it can now make no commitment at all. Both changes effectively remove the need to distinguish between cash and debt contributions when establishing the PFLP.
From a UK tax perspective, if limited partners in a PFLP do not contribute any capital and only provide loans to such PFLP then, strictly speaking, those limited partners would fall outside the definition of “investors” for the purposes of the 2003 Memorandum of Understanding between the BVCA and HMRC on, inter alia, the tax treatment of carried interest (the “MoU”) (an investor for those purposes being a limited partner that contributes both capital and loan). As the stated intention of the LRO is not to change the UK tax treatment of limited partnerships that are registered as PFLPs, it is hoped that HMRC will interpret the MoU as applying in these circumstances. However, limited partners may wish to clarify the position with HMRC in circumstances where they are seeking to rely on the MoU.
3. Exemption from certain statutory duties
Currently: Limited partners are subject to the duties to disclose information/accounts to their fellow partners and not to compete with the partnership under the Partnership Act 1890 (“PA 1890”).
Changes: A limited partner in a PFLP is no longer under such duties (albeit that the PA 1890 allows for the duties to be disapplied by consent of all the partners).
Comment: This is a positive change given that the restrictions contained in the PA 1890 are not appropriate for the passive investment of institutional and other passive investors who can often have interests in funds that follow similar investment profiles to that of the PFLP in question.
4. Winding up
Currently: Limited partners must obtain a court order to wind up the English LP where a sole general partner is removed and the partnership is dissolved.
Changes: Where a PFLP is dissolved at a time when there is no general partner, the limited partners are no longer required to obtain a court order to wind up the limited partnership and can appoint a third party to carry out the winding up (although such party cannot be a limited partner). Where there is a general partner, it is the general partner who must wind up the affairs of the partnership, but this is subject to express or implied agreement between the partners (and so alternatively may be a third party if the partners so wish).
Comment: A further change to reduce the administrative burden of private investment funds, the absence of a mandatory court order should positively impact the time and administrative hurdles involved with a winding up.