The new private fund limited partnership vehicle

UK limited partnerships are one of the most common and popular vehicles for investments in
various sectors in Europe, including private equity, real estate and infrastructure, offering a flexible, tax-transparent vehicle that provides the protection of limited liability to fund investors, provided that they do not take part in the management of the partnership business – if they do, they become liable for the debts and obligations of the limited partnership. Whilst fund investors are generally passive, many seek to include consultation and approval rights in partnership documentation to protect their interests. The existing UK legislation provides little guidance or clarity on when these consultation and approval rights might cross the line and constitute involvement in management. A conservative approach is typically taken.

The Legislative Reform (Private Fund Limited Partnerships) Order 2017 (the Order) introduces the new private fund limited partnership (or PFLP) for qualifying funds.

A PFLP will retain the flexibility of a limited partnership and limited liability for investors, whilst setting out a clearer regime in relation to the rights that investors could exercise without compromising their limited liability status. No change is proposed to the tax treatment of any form of limited partnership.

Designation of a PFLP

To be registered as a PFLP, a new limited partnership will need to apply for this designation on registration.

The designation will only be available for limited partnerships that meet the private fund conditions, which are that the partnership is constituted by a written agreement and is a collective investment scheme. The application will require a compliance confirmation by a general partner that the partnership meets the private fund conditions.

Existing limited partnerships meeting the private fund conditions will be able to apply for re-designation as PFLPs at any time. However, once a partnership becomes a PFLP it will not be able to return to ordinary limited partnership status.

A PFLP cannot also be a contractual scheme under section 235A of the Financial Services and Markets Act 2000.

Capital contributions

Typically, limited partners’ contributions to a limited partnership are structured by way of a 0.1% contribution to capital, with the balance being provided by way of debt. This split arises because there are stringent restrictions which apply on withdrawing capital from the limited partnership during its continuation: where capital is withdrawn, the limited partner becomes liable for the debts and obligations of the limited partnership up to the amount withdrawn.

Limited partners in PFLPs will no longer be required to make any capital contribution. The option to make capital contributions will continue and capital will be withdrawable for limited partnerships established after the Order is in force. There will be no requirement to publicise capital contributions.

For limited partnerships established before the Order comes into effect, capital contributions will continue to be treated as under the current regime: capital will be not withdrawable and, if it is withdrawn, the relevant limited partner will continue to be liable to contribute to the debts of the partnership up to the amount withdrawn. The publicity regime will continue to apply.

Permitted activities for PFLP limited partners

The Order will insert a new section 6A into the Limited Partnerships Act 1907 setting out a non-exhaustive “white list” of activities which a limited partner in a PFLP could undertake without being considered to be taking part in management of the partnership. Limited partners will be able to exercise these rights in relation to an underlying fund within a feeder fund structure.

The “white list” is not intended to enable limited partners in PFLPs to carry out new activities that would involve their taking part in management of the business or to prejudice the role of the general partner, but rather to give certainty that a limited partner’s involvement in specified activities will not prejudice its limited liability status. The principle is that the limited partner’s role is to monitor performance, advise the general partner and have its consent sought to actions taken by the general partner, but not to act on behalf of the partnership. There is no “white list” sanction, for example, for a limited partner to take on a directorship of a company in which the fund is invested.

The full “white list” is not permissible by right – funds wishing to take advantage of the list must adopt it in the partnership agreement and will be able to select activities from the list. The existence of the list does not create any adverse presumptions for limited partners in other limited partnerships.

The “white list” includes the following activities:

• taking part in decisions to vary or waive the terms of the partnership agreement, to change the general nature of the partnership, to extend its term or to admit or remove partners
• appointing a person to wind up the partnership
• enforcing entitlements under the partnership agreement (provided that this does not extend to taking part in management of the partnership’s business)
• entering into, or acting under, a contract with the other partners (provided that this does not extend to taking part in management of the partnership’s business)
• providing surety or acting as guarantor for the partnership
• approving the partnership accounts or valuations of its assets
• consulting with or advising a general partner or partnership manager or adviser about the partnership’s affairs or accounts
• taking part in decisions about changes to persons responsible for the day-to-day management of the partnership
• acting, or authorising a person to act, as a director, member, employee, officer or agent of, or a shareholder or partner in, a general partner of, or a manager or adviser to, the partnership (provided that this does not extend to taking part in management of the partnership’s business)
• appointing or nominating a person to represent the limited partner on a committee of the partnership (such as an advisory committee), and authorising that person to take any action in that capacity (provided that this does not extend to taking part in management of the partnership’s business)
• taking part in a decision approving or authorising an action proposed to be taken by a general partner or manager of the partnership, such as the disposal of all or part of the partnership’s business; the acquisition of a business; the acquisition or disposal of a type of investment or particular investment (this would not include the selection process for investments); the participation of a limited partner in a particular investment (such as through co-investment rights); or the incurring, extension, variation or discharge of partnership debts.

PFLP exemption from statutory duties

Limited partners in a PFLP will be exempted from the duty to render accounts and information between partners (in section 28 of the Partnership Act 1890) and from the restriction on competing with the partnership (in section 30 of the Partnership Act 1890). These were seen as inconsistent with the position of a largely passive investor who might be invested in a number of funds with similar objectives/investment policies.

The duty under section 29 of the Partnership Act 1890 to account to the partnership for any benefits from transactions concerning the partnership without the consent of the other partners will, however, continue to apply to limited partners in PFLPs.

Striking-off and winding up of PFLP

Limited partners will be permitted to appoint a third party to wind up a PFLP (without the need for a court order) where the general partner has been removed, subject to any express or implied agreements between them in this respect.

The new PFLP regime constitutes a welcome modernisation of some aspects of the law applying to limited partnerships. It will provide a much greater degree of certainty for limited partners without prejudicing their limited liability status. Investment fund managers, and investors, should now consider how these proposals might be reflected in their fund structures.

There are no present proposals to extend any of the new changes to ordinary limited partnerships. The Government said in March 2016 that this could be beneficial as a next step but that further consultation and an assessment of risks and impacts would be required.

The Legislative Reform (Private Fund Limited Partnerships) Order 2017

Legislative Reform Order on the Limited Partnership Act: explanatory document