By Erik Jamieson, Partner and Jeremy Pickles, Counsel at Hogan Lovells
Over summer 2015, the UK Government launched a long awaited and much anticipated consultation to modernise UK limited partnerships for the private fund industry. If introduced, the proposed reforms will have a major impact on many private equity and venture capital funds.
The consultation stems from the UK Government’s Investment Management Strategy and aims to ensure that the UK limited partnership remains the market standard structure for European private funds. While UK limited partnerships remain undoubtedly popular, it has long been recognised that the underpinning law is unnecessarily complex and administratively cumbersome. Reform is therefore long overdue and welcome even though, in many ways, it simply represents a much needed catch-up to more modern regimes that are already in place in other jurisdictions (for example, Delaware, the Channel Islands, Luxembourg and the Cayman Islands).
The proposed reforms apply only to "private fund limited partnerships" ("PFLPs") with the existing regime remaining in place for other limited partnerships. The key characteristic of a PFLP is that it must be a collective investment scheme as defined under the Financial Services and Markets Act 2000. Most private equity and venture capital funds structured as UK limited partnerships are therefore likely to be PFLPs and will able to take advantage of the new regime. New funds will be able to register as PFLPs and existing funds will have 12 months from the legislation coming into force to apply to be designated as PFLPs.
PLFPs will benefit from, among other things
- The removal of: (a) the obligation of limited partners to make capital contributions at the time of entering into the limited partnership; and (b) the liability of limited partners to repay capital contributions that have been withdrawn during the life of the limited partnership. The original purpose of these provisions was to protect creditors but they are no longer seen as being relevant in the private fund context. This is because investors’ commitments are typically split into a nominal capital contribution and a substantial loan commitment (which is principally intended to negate these provisions). As a consequence, the capital contributions have little bearing on the actual solvency of the limited partnership. Creditors are therefore in practice much more likely to focus on the assets of a limited partnership generally and the contractual powers to call capital and recall distributions that are typically contained in a limited partnership agreement.
Loan/capital splits, a source of confusion for many investors unfamiliar with the peculiarities of UK limited partnership law, may therefore be a thing of the past. The new regime does not, however, prevent a limited partnership from adopting the split (for all or some partners) and there may be tax benefits in certain jurisdictions for doing so.
In addition, no capital contributions means that there is no longer any need to disclose capital contributions at Companies House, thereby protecting the confidentiality of the amounts each limited partner has invested in a fund (which can often be calculated by reference to the capital contribution). The name of the investor and the fact that it is a limited partner in a particular limited partnership will still be a matter of public record, however.
- A "white list" of permitted activities that limited partners will be able to carry out without being seen to be taking part in the management of the limited partnership, thus protecting their limited liability status. The contents of a "white list" are not unexpected and do not stray too far from the rights limited partners are typically granted in private funds. For example, approving/vetoing particular investments, exercising excuse rights, enforcing rights under limited partnership agreement and discussing the partnership’s business and prospects.
It also expressly permits a limited partner to be an officer, employee or shareholder of the general partner, manager or investment adviser, which is a welcome clarification. However, managers should note that the some of the provisions are currently broadly drafted (such as "taking part in a decision authorising an action that the general partner proposes to take"), which could lead to limited partners requesting participation rights in respect of all sorts of decisions. Managers will no longer be able to cast aside such requests simply on the basis that the investor could imperil its limited liability status.
- A number of technical improvements, such as creating a mechanism whereby a limited partnership can be removed from the register, excluding certain statutory fiduciary duties that are more relevant to general partnerships, removing certain disclosure requirements, permitting the partners to agree among themselves who can wind up a limited partnership without having to seek a court order and removing the requirement for a Gazette notice on the transfer of a limited partnership interest.
Whether the reforms meet their aims remains to be seen, but removing the uncertainties and anachronisms in UK limited partnership law is helpful to their remaining competitive as a fund vehicle. As a consequence, the reforms have been generally well received. We anticipate that the consultation process (which closed on 5 October and to which Hogan Lovells responded) will result in the details outlined above being refined and improved rather than overhauled. The reforms are likely to be effective in early 2016.
You can read the other articles from Ipes' Private Equity update (edition 20) at the following links: