UK Limited Partnership Reform: a new option for UK private investment funds

The long awaited reform of the UK’s regime for limited partnerships (the Limited Partnership Act of 1907) has finally arrived in the form of the Legislative Reform (Private Fund Limited Partnerships) Order 2017 (“LRO”). The LRO, which came into effect on 6 April 2017, allows private funds to adopt a new form of UK limited partnership, a private fund limited partnership (“PFLP”) that could be a more attractive option for fund managers.

The LRO amendments to the 1907 Act, which has remained largely unchanged throughout its history, are designed to ensure the framework for PFLPs better suits the needs of private fund investments while maintaining the UK’s appeal as a fund domicile.

The key changes of the LRO are:

  • Designation as a PFLP

Limited partnerships that meet the qualifying conditions may elect to be treated as a PFLP. Essentially, limited partnerships which are collective investment schemes as defined in FSMA 2000 will meet the conditions, meaning that most alternative funds, co-investment and carried interest vehicles will qualify. Certain joint ventures or club deals may not qualify according to the active participation of their investors, and eligibility would need to be assessed on a case by case basis.

The general partner can make the application to Companies House at formation or any future time when the conditions are met. The same applies to limited partnerships in existence when the rules come into effect. However, once the PFLP designation has been issued to any limited partnership, it is irrevocable.

  • White list of actions for limited partners

The LRO provides a non-exhaustive list of activities that are not considered as taking part in the management of the PFLP and would therefore not compromise the limited liability status of any limited partners undertaking such actions. The list is intended to allow for a limited partner to monitor investment performance and approve actions of the general partner, but without risk of acting for the partnership itself.

White list actions include, for example, taking part in decisions about changes to the partnership agreement, decisions on acquisitions or disposals of investments and approving the accounts of the partnership. The white list will be of significant interest to the sector, providing a level of assurance to investors in their roles as limited partners.

  • Capital contributions

The requirement in the 1907 Act for limited partners to make capital contributions does not apply to PFLPs, effectively removing any restrictions on repayment of investor funds. The need for an arbitrary split of investor funds between capital and loan is thus avoided and investors will not need to contribute ‘nominal’ capital to be first admitted to the partnership, easing an administrative burden. Where capital contributions are made to a PFLP, there is no requirement to publicise these.

  • Winding up

While the 1907 Act requires that the winding up of a limited partnership is a duty of the general partner, limited partners of a PFLP can appoint a third party to undertake this process. This is relevant where the partnership is being terminated for cause, or where the general partner has been removed and saves the limited partners from applying for a court order for the winding up.

  • Gazette notices

The archaic practice of filing Gazette notices for changes of limited partner interests is abolished for PFLPs. However, notices are still required for a change of general partner and until the notice is published, any person will be entitled to treat a retiring general partner as the current general partner.

Conclusion

The LRO came into force on 6 April 2017. The PFLP option is a welcome updating of the 1907 Act and will provide fund managers with a more suitable choice for structuring private funds in the UK. Investors too will benefit from greater clarity on the extent of their rights as limited partners, without prejudicing their limited liability status.

Fund managers should now be considering whether to take advantage of the PFLP regime for imminent launches, as well as weighing up the benefits of converting existing schemes in the near future.

 

For more information, please contact Adam Kowalski (akowalski@citco.com), Real Estate Fund Services.