SPOTLIGHT ON EUROPE
European private funds often choose to domicile in the United Kingdom, and successive UK governments have expressed a strong desire to maintain that leading position. As anticipated in a previous edition of the Private Equity Report,1 recent and long-awaited reforms to UK limited partnership law,2 which will have the effect of creating a new vehicle for private fund managers, have been designed with that objective in mind —and it is clear that the new regime will significantly enhance the flexibility and attractiveness of English and Scottish limited partnerships, the UK’s principal fund vehicles. The final form of the changes is, in fact, even better than those previously suggested in a 2015 consultation.
The Private Fund Limited Partnership (“PFLP”)
English and Scottish limited partnerships (referred to herein as “UK limited partnerships”) have been a popular choice for private fund managers since 1987, when the government and the tax authority jointly confirmed certain aspects of their tax, legal and regulatory treatment. But, since then, other European jurisdictions have sought to erode the UK’s competitive advantage by reforming their own existing fund vehicle structures, or by introducing new ones.
That means there is now a range of partnership and partnership-like vehicles that can be used by European fund managers, and the choice of vehicle is usually an important question to be addressed up-front on any new fund raising. That question will inevitably be asked afresh in light of the UK’s impending departure from the European Union and, for many managers who do not need an EU fund, an English or Scottish “Private Fund Limited Partnership” (as this new vehicle is called) will be the right choice.
For managers with existing UK limited partnerships, it will be possible to opt them into the new regime, and most fund managers will probably decide to take up that option. However, it is important to note that the new regime is entirely voluntary: managers can continue to create new limited partnerships, or operate existing ones, under the old rules if they wish.
Key Features of the New Regime
Paradoxically, the most important feature of the new regime is that it is not very different from the old one: the fundamental features of the existing limited partnership vehicle—which is familiar to investors and their advisers, and sits upon a body of well-understood law—are preserved. In particular, the changes have no impact on the tax status of the UK limited partnership, nor do they interfere with the contractual freedom that has been a hugely important reason for the limited partnership’s dominance.
Instead, the changes make some small but important changes to the detailed rules, all of which are designed to make the regime more flexible, and therefore more able to accommodate the negotiated outcomes desired by the parties, or easier to administer.
For example, the UK has adopted an approach familiar in other popular fund vehicle jurisdictions and provided a non-exhaustive “white list” of activities that investors can safely engage in without risking their limited liability status. Furthermore, the UK white list is extensive and, for example, allows the investor to take part in a decision about the acquisition or disposal of a particular investment, or the exercise of the partnership’s rights in relation to an investment. Of course, whether a limited partner has the right to be involved in such decisions will be a matter determined by the limited partnership agreement—and it will often not be consistent with the overall relationship among the fund sponsor and its investors—but if that is the negotiated outcome (as it may be in a pledge fund or separately managed account), the legal barriers to using a UK limited partnership have gone.
Another very important change is the abolition of the requirement for a limited partner in a PFLP to make a capital contribution, and a provision enabling any previously contributed capital to be returned to investors before the end of the life of the partnership. That will simplify the accounting and closing process and eradicates the risk that a small administrative error might jeopardize an investor’s limited liability status.
PFLPs will also be easier to administer, with some requirements to register or advertise information abolished (on the basis that they offered no useful protections for third parties). There are also changes to make it easier for limited partners to arrange the winding up of a partnership, and certain default duties of partners are dis-applied (but could be re-applied by contract if desired).
Legal personality: No Change (Yet)
Scottish partnerships have separate legal personality, whereas those established elsewhere in the UK do not. The government has previously said that it will explore whether to allow limited partnerships to elect whether they would like to have legal personality wherever in the UK they are established, in order to give all partnerships that option. However, such a change would require primary legislation and is therefore not included in this round of reforms. The government is also looking at the rules relating to Scottish limited partnerships more generally, because there have been concerns that these have been subject to abuse by criminals. Further change to the rules may therefore be expected in future.
Alongside the British Private Equity and Venture Capital Association, members of the Debevoise & Plimpton Investment Management Group have worked hard over many years to secure these changes and they represent an important step forward for European fund structures. We expect the new regime to be widely adopted.
1 See http://privateequityreport.debevoise.com/the-private-equity-report-fall-2015-vol-15-no-2/consultation-on-uk-limited-partnership-law-reform.
2 The final form of the Order which brings these changes into effect is available at: http://www.legislation.gov.uk/uksi/2017/514/contents/made.