By Neil Kennedy, Partner, Corporate Group at Glasgow headquartered law firm MacRoberts
Private investment funds are an important feature of our modern global economy. To date, the UK limited partnership (LP) has been a popular vehicle for foreign investors. However, it is not wholly fit for purpose as the law has not significantly changed since the enactment of the Partnerships Act 1890 and the Limited Partnerships Act 1907. In order for the UK to remain competitive, further reforms were required.
On 6 April, the Legislative Reform (Private Fund Limited Partnerships) Order 2016 (the Order) came into force, amending the Limited Partnerships Act 1907. The Order introduces a new partnership structure – the Private Fund Limited Partnership (PFLP) – which is designed for private investment funds, such as private equity and venture capital funds, to provide all the benefits of limited liability and transparency for investors whilst reducing the financial and administrative burdens often felt under the existing structure.
What are the key changes?
Designation as a PFLP
In order to be designated as a PFLP the LP must:
- be constituted by written agreement; and
- be a collective investment scheme (within the meaning of s235 of the Financial Services and Markets Act 2000).
As long as the conditions are met, an application for designation as a PFLP can be made by the general partner at the time of registration of the LP, or at any time thereafter. But once an LP has been designated as a PFLP, the process cannot be reversed.
“White list” activities
The “white list” is a non-exhaustive list of permitted activities the limited partner (usually the investor) is allowed to engage in without being considered as taking part in the management of the partnership. The list provides clarity for investors and will allow them to carry out activities which are considered routine for investors to undertake without the worry that they may lose their limited status by getting involved in the management of the fund.
Contributions to capital
Unlike a limited partnership, there is no requirement for limited partners in a PFLP to contribute to the capital of the company. Instead limited partners will have the option to contribute to the capital of the partnership, and if they do, will have the ability to withdraw this capital during the life of the partnership without incurring liability, up to the amount of the withdrawn capital.
However, this will only apply to new partnerships designated as a PFLP. For those existing limited partnerships now designated as PFLPs the former system will apply whereby any capital contribution will not be capable of withdrawal without the limited partner incurring the liability.
Exemption from statutory duties
A couple of provisions relating to partners duties to the partnership have been removed for limited partners in a PFLP, such as the duty not to compete with the partnership. This section is regularly removed by the limited partnership agreement as many large investors will also invest in other similar funds, but its disapplication in PFLPs will eliminate this administrative burden.
The Order applies across the UK, including Scotland and by extension to Scottish limited partnerships (“SLP”). Unlike LPs in the rest of the UK, SLPs have separate legal personality which allows them to enter into contracts, own property and sue and be sued, all in the name of the SLP. The SLPs mix of separate legal personality and limited liability makes it a popular investment vehicle.