With around 35% of all assets managed in Europe being managed in the UK, the UK is a leading centre for fund management. The UK’s private equity and venture capital industry has continued to be the largest in Europe for a number of years and is accountable for more than €34 billion in investments being raised annually. This accounted for around 64% (EVCA data as of 2013) of Europe’s annual fund raising.
The most commonly used structure in the UK asset management and funds space is the limited partnership, which is governed by the Partnership Act 1890 and the Limited Partnership Act 1907. However, despite the practical significance of this structure and its governing laws, not only on a UK but an EU-wide scale, the two pieces of legislation have remained largely unchanged for the latter half of the 20th century. This has become particularly problematic in light of the fact that the existing UK limited partnership legislation has not been able to fully accommodate the emerging and developing needs of private equity and venture capital funds.
On 23 July 2015, Her Majesty’s Treasury published a ‘Proposal on using Legislative Reform Order to change partnership legislation for private equity investments’ (the “Consultation”). which proposes a number of amendments to current partnership legislation. The changes are aligned with the government’s objectives to address the above-mentioned issues through maintaining and enhancing the UK’s competitiveness as a centre for fund domicile and minimising costs to investors. The proposed amendments in the Consultation expand investor choice while maintaining strong investor protection and the integrity of the regulatory regime.
Below we have a provided summaries of the key changes proposed in the Consultation. The proposed changes, if implemented, will apply to those limited partnerships which are private fund vehicles.
- The Consultation proposes an option for existing limited partnerships to become designated as private fund limited partnerships within the first year of the changes coming into effect. The amended regulatory regime will apply, therefore allowing such partnerships to benefit from the changes to legislation.
- Under the current statutory regime, there is no procedure for removing a limited partnership from the register. Private equity and venture capital funds often have a fixed life cycle and are wound down at the end of this period. The proposed changes in the Consultation would grant the Registrar of Companies the power to remove such entries on application by the partnership, or where the partnership is no longer operating.
- Under the Limited Partnerships Act 1907, if a limited partner ‘takes part in the management of the partnership business’, they will be liable for all debts and obligations of the partnership as a general partner. However the Act does not expressly state what actions are, or are not, to be considered to amount to taking part in the management of the partnership business. The proposed changes in the Consultation introduce a new section 6A of the Limited Partnerships Act. This section sets out a non-exhaustive list of activities that a limited partner in a private fund limited partnership may undertake without being considered as taking part in the management of the business, and therefore without losing their limited liability.
- Under the Limited Partnership Act 1907 a limited partner “shall at the time of entering into such partnership contribute thereto a sum or sums of money as capital or property valued at a stated amount.” However, there is no stipulated amount of capital that a partner must contribute. The Consultation proposes to remove the requirement for limited partners in private funds to make a capital contribution, and to remove the liability of limited partners in private funds for capital contributions that have been withdrawn.
- The Consultation proposes to allow the partners in private funds to agree among themselves who should wind up the limited partnership, thereby removing the requirement of having to obtain a court order for winding-up.
- With the aim of reducing the administrative burden of registering a private fund as a limited partnership and protecting investors’ privacy, the Consultation proposes removing some of the details requirements, that must be specified when a private fund established as a limited partnership, is registered, and when such details change. These details include the amount of capital contributed.
- Under the Limited Partnerships Act 1907, if a general partner becomes a limited partner or a limited partner assigns its interest in a limited partnership to another person, it will only have effect after being advertised in the London, Edinburgh or Belfast Gazette (as appropriate). The Consultation proposes to remove the advertisement requirement in respect of private funds.
- Currently a limited partner is subject to certain duties, generally applicable to partners, but which appear inconsistent with the position of a largely passive investor who may have investments in numerous funds, some of which may fund competing businesses. The Consultation therefore proposes a provision exempting limited partners in private funds from these duties.
Comments are invited on the proposals and draft order to help inform the final shape of the proposals and the related legislation.
To view the full publication along with more details on how to submit comments, please follow this link.
If you have any questions in relation to the proposed changes to partnerships law or if you require any advice or assistance in relation to structuring your partnership or implementing legislation, please feel free to get in touch with us. Cleveland & Co, your external in-house counsel, are here to help.