With effect from 6 April 2017, the United Kingdom has overhauled its limited partnership legislation to create a new form of limited partnership: the Private Fund Limited Partnership (“PFLP”). The PFLP is designed solely for private funds, and aims to create a more flexible vehicle for private equity, infrastructure and real estate fund managers. When compared with the existing UK limited partnership vehicle—which will continue to be available—the PFLP is less burdensome administratively, reducing the number of public filings that are required, as well as reducing the content of any filings that are required. The PFLP also offers investors greater certainty in relation to their limited liability.
This note considers the key differences between the PFLP and the existing UK limited partnership vehicle, and analyses whether existing UK limited partnerships should choose to opt in and become designated as PFLPs.
The governing legislation for limited partnerships in the UK is the Limited Partnerships Act 1907 (the “LP Act”). UK limited partnerships have historically found popular use as fund vehicles in the private equity, infrastructure and real estate space. Yet the relevant law—dating back over a century and to a time well before the vehicle was adopted as a fund vehicle—has been rarely updated. As a result, some aspects of the operation of the UK limited partnership have been considered dated, when compared with other jurisdictions such as the Cayman Islands, Delaware, Jersey and, most recently, the Abu Dhabi Global Market. While entirely workable, the UK limited partnership vehicle was subject to oddities and idiosyncrasies that were considered unnecessary, burdensome and archaic by many in the funds industry. As far back as 2001, the Law Commissions of England and Wales, and of Scotland, consulted and then reported to the UK Government on these perceived issues, recommending changes to bring the UK vehicle up-to-date and consistent with equivalent limited partnerships elsewhere.
After a long interlude, The Legislative Reform (Private Fund Limited Partnerships) Order 2017 (the “Order”), which took effect on 6 April 2017, finally responded to many of these recommendations. The Order amended the LP Act to create the PFLP as an alternative—but only for private funds—to the existing limited partnership.
Critically, no change is proposed to the tax treatment of either the existing limited partnership model or the PFLP.
Qualification as a PFLP
Existing and new limited partnerships may elect to be designated as a PFLP if the following two conditions are satisfied:
- the partnership is constituted by an agreement in writing; and
- the partnership is a collective investment scheme (as defined in Section 235 of the Financial Services and Markets Act 2000).
It is expected that most funds and other alternative investment vehicles will satisfy these conditions.
Any limited partnership that does not elect to be designated as a PFLP will continue to be subject to the “old” rules.
For a PFLP that is newly registered on or after 6 April 2017, limited partners are not subject to the rule that restricts repayment of capital contributions before the end of the fund’s life.
In practice, this means that the historical, and artificial, need for a limited partner’s commitment to be split into a tiny capital contribution (say 0.001% of the commitment) and a large loan commitment (the remaining 99.999%) falls away. For new PFLPs, limited partners will simply be able to make capital contributions to the PFLP over time, as is already the case with limited partnerships in many other jurisdictions.
In addition, there will no longer be any requirement to make a capital contribution at all. In the past, limited partners have needed to make their tiny capital contributions at the time of admission to the limited partnership. Often, to make life easy for investors, the sponsor would pay the initial capital contributions on behalf of the investors, by way of a loan repayable on demand. For new PFLPs this practice will be unnecessary.
A knock-on consequence of there not needing to be a capital contribution is that Companies House does not need to be told of the amount of capital contributed by a new partner. A filing which names the limited partner will, however, continue to be required.
Existing Funds Which Designate as PFLPs
Existing limited partnerships registered before 6 April 2017, but which have subsequently been designated as a PFLP, are treated slightly differently. Capital contributions made before the fund was designated as a PFLP are subject to the old rules and, therefore, cannot be returned during the life of the fund.
By contrast, capital contributions after the fund’s designation as a PFLP are subject to the new rules. In principle, then, those contributions can be returned to the limited partners before the end of the fund’s life. However, the ability to return those capital contributions will naturally be subject to the terms of the fund’s limited partnership agreement (“LPA”), which generally will prohibit such a return of capital.
It is likely that the changes made to the capital contribution regime for PFLPs will, therefore, principally be of benefit to new funds created after 6 April 2017. Funds that have completed their capital raising will already have investors who have made contributions subject to the old rules. Other funds that are still capital raising—but have had at least one closing—will likely find it cumbersome and unnecessary to amend the LPA to create a twin track approach to capital contributions; one for early investors who made capital contributions pre-designation as a PFLP, and one for subsequently admitted investors.
Changes to the Partnership—Public Filings
The Form LP6, which has been, and which will continue to be, used to notify Companies House of certain changes to the limited partnership, has been amended by the Order. For PFLPs, there is no longer any need to make any filing (i) to reflect a change in the PFLP’s term or character; (ii) to reflect a change in the nature of the PFLP’s business; or (iii) specifying an increase in capital contributions made (or by whom).
Separately, and importantly, transfers of limited partnership interests in PFLPs do not need to be advertised in the Gazette. The Act has previously specified that a transfer will not become legally effective until notice of the transfer is advertised in the Gazette. This was an unnecessarily burdensome requirement which, without delicate planning, could interfere with investors’ and sponsors’ wishes to have a transfer effective on a date of their choosing.
These changes apply to all PFLPs, so will benefit existing funds that designate as PFLPs as well as newly-registered PFLPs.
Relaxation of Certain Duties
Limited partners in a PFLP are exempt from the statutory duty to render accounts and other information, and also from the requirement not to engage in activities competing with the partnership. Clearly, though, an LPA can still provide for contractual agreement as between the partners on these matters.
Limited partners enjoy limited liability so long as they do not participate in the management of the limited partnership’s business. In many jurisdictions, the legislation governing limited partnerships contains a list of activities in which a limited partner can participate without participating in the management of the partnership’s business. The UK has now followed suit and, for PFLPs only, the Act contains a non-exhaustive list of safe harbours for limited partners.
Activities which will not, by themselves, constitute participating in management include, among others:
- taking part in decisions about amendments of the LPA, the admission of new partners or changes to the PFLP’s business;
- appointing a person to wind up the PFLP;
- reviewing or approving a valuation of the PFLP’s assets;
- discussing the prospects of the PFLP’s business;
- consulting with or advising with a general partner, manager or adviser about the affairs of the PFLP;
- taking part in a decision regarding changes in those responsible for the PFLP’s day-to-day management;
- acting as a director, member, employee, officer, agent, shareholder or partner of or in a general partner, manager or adviser of the PFLP, so long as this does not involve participating in the management of the PFLP’s business;
- appointing or nominating a person to represent the limited partner on a committee, so long as this does not involve participating in the management of the PFLP’s business; and
- taking part in a decision approving or authorising an action to be taken by a general partner, manager or adviser. A number of examples are given, including: (a) acquisitions and disposals of investments; and (b) the exercise of the PFLP’s rights in respect of an investment.
It is worth noting that several of the listed activities are unhelpfully circular, in that they are specified not to constitute participating in management so long as, effectively, they do not constitute participating in management.
Unlike other UK limited partnerships, a PFLP structure allows limited partners (subject to the terms of the LPA) to authorise a third party to wind up the PFLP without the need for a court order.
Should a Fund Designate as a PFLP?
New funds are likely to designate as a PFLP, given the reduced administrative burden and other benefits such as the list of permitted activities (relating to limited liability). Although there is no requirement to do so, it appears likely that managers will also take advantage of the ability to remove the distinction between capital contributions and loan commitment—although for many this will mean revisiting their standard form of LPA.
For existing funds, the position is likely to be that designating as a PFLP is an attractive option. However, managers would be well-advised to do two things before deciding to designate their funds as PFLPs. First, it should be determined that the manager or general partner has the power, under the LPA or the applicable management agreement, to designate the fund as a PFLP and make the associated filing with Companies House.
Second, the LPA in particular should be reviewed to ensure that there are no provisions which will require amendment as a result of the changes that come with designation as a PFLP. If amendments are necessary, it will be important to assess whether the general partner has the power to make those amendments without obtaining the consent of investors or of the Advisory Board.
Process for Designating as a PFLP
A new fund seeking designation as a PFLP should use a new form—the Form LP7—instead of the old Form LP5. The new Form LP7 is straightforward, requiring only the following information: (a) the name and signature of each general partner; (b) the name and signature of each limited partner; and (c) the address of the principal place of business of the PFLP.
On registration of a new PFLP, the PFLP will be issued with both a certificate of registration and a certificate of designation—although Companies House has the power to issue a combined certificate if it chooses to do so.
An existing fund will need to use the new Form LP8 in order to become designated as a PFLP. The Form LP8 is also mercifully brief and requires the following information: (a) the registered number of the fund; (b) the date of registration of the fund; (c) the name and signature of each general partner; and (d) the address of the principal place of business of the fund.
The introduction of the PFLP is a welcome—and long overdue—development in the UK private funds industry. It brings the UK in line with other preeminent jurisdictions offering limited partnership structures, and offers both managers and investors tangible improvements on what was already a well-known and robust regime.
For new managers looking at establishing a limited partnership in England and Wales, or Scotland, a decision to designate as a PFLP should be simple. For existing managers, there are clear benefits in doing so with little downside—provided that those managers have the authority to elect to do so and that amendments to the relevant LPA are either unnecessary or can be effected easily.
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