The Treasury has issued a consultation document that clearly signals its recognition of the value to the UK economy of the private funds sector (including private equity and real estate funds). It proposes significant changes to the legislation governing limited partnerships which are designed to remove legal complexity and uncertainty and to reduce administrative burdens and costs for private funds.
The proposals apply to limited partnerships that are collective investment schemes and may include main fund vehicles, parallel funds, feeder funds, co-investment vehicles and carried interest vehicles, among others.
The proposals demonstrate a recognition that partnership legislation dating from over a century ago does not always sit easily with fund management practice. Modernisation is desirable in order to promote certainty and to remove unnecessary barriers and burdens.
The proposals include:
Private fund designation
It is proposed that limited partnerships that meet the private fund criteria will be designated as such on the public register maintained at Companies House. New limited partnerships would be designated as such on registration, while existing limited partnerships would be permitted to designate themselves as private funds within a year of the changes coming into force.
Permitted activities for limited partners
A "white list" of activities is proposed so as to provide certainty to private fund limited partners in relation to steps that can be taken without threatening the loss of their limited liability. These would include:
- taking part in a decision about:
- variation of the partnership agreement;
- limited partnership investments, debts and obligations;
- changes in partnership business (including acquisitions or disposals of business);
- partners joining and leaving the partnership; and
- dissolution or winding up of the partnership.
- enforcing rights (other than rights to carry out management functions) under the partnership agreement;
- approving partnership accounts and valuations of partnership assets;
- entering into contracts (excluding contracts requiring the limited partner to take part in management functions) with the partnership or a general partner in it;
- acting as a director, member, employee, officer or agent of, or a shareholder or partner in, a general partner (or any other person appointed to manage or advise the partnership);
- taking part in a decision:
- which involves an actual or potential conflict of interest relating to the partnership or its business;
- regarding changes in the persons responsible for the day-to-day management of the partnership; or
- authorising an action proposed by the general partner.
- consulting general partners or other managers about partnership affairs or accounts;
- appointing or nominating persons to represent the limited partner on a committee (or revoking any such appointment or nomination); and
- providing surety or acting as guarantor for the partnership.
Private fund limited partners are proposed to be relieved of certain statutory duties:
- to render accounts and information to other partners; and
- to account to the partnership for profits made in competing businesses.
The consultation recognises that these duties are not appropriate for passive investors with a wide portfolio of investments.
The requirement for capital contributions is proposed to be abolished for limited partners in a private fund. Private fund limited partners (including any that withdraw capital contributed) would not be liable for the debts or obligations of the partnership beyond the amount of partnership property available to the general partners. This would enable private fund finances to be structured more simply and aligned with investment objectives.
There are proposals to permit a private fund to be wound up without an order of the Court, on the application of the general partner (or, if none, the limited partners). This would greatly reduce both the time and cost of a winding up.
Removal of limited partnerships from the public register
A new procedure is proposed whereby private funds may be removed from the public register on application of the partners. This will permit funds that are inactive or have been wound down to be taken off the register; one result of this would be to enable private fund limited partnership names to be re-used, which is currently not possible.
There are proposals to reduce the amount of information required on the public register in relation to private funds; the requirements to state the term for which the limited partnership is to be entered into and the amount of capital contributed by each limited partner would be removed. This could help to keep investment decisions more private, since third parties would be unable to monitor movements in capital contributed.
The requirement to notify certain changes (such as a general partner becoming a limited partner or the assignment of a limited partner's interest) in the Gazette would also cease to apply to private funds.
FCA Authorised limited partnerships
The current proposals do not extend to limited partnerships that are authorised by the FCA.
Deadline for responses
The consultation closes on 5 October 2015. The link at the top of this article contains details of how to submit comments.
As recognised by the consultation document, the UK private equity and venture capital industry is by far the largest in Europe. Almost two thirds of the funds raised in Europe in 2013 were raised by funds managed in the UK and around 35% of assets under management are managed from the UK. The Treasury states its intention to ensure that the UK limited partnership "remains the market standard structure for European private equity and venture capital funds as well as many other types of private fund in an increasingly competitive global market".
It is to be hoped that the industry engages fully with the consultation so as to enhance the value of limited partnerships as fund vehicles. If ease of use can be added to the existing flexibility, UK tax transparency and limited liability provided by limited partnerships, we can have greater confidence in the continuing dominance of the UK as a leader of European private equity and venture capital funds.