UK Treasury moves to make limited partnerships more competitive

As the consultation documents state, the UK's limited partnership has been governed by the Partnership Act of 1980 and the Limited Partnerships Act 1907, neither of which has seen much change over the past 100 years. Aware that other countries are increasing the attractiveness of their limited partnerships, the Treasury has set out a raft of proposed changes as a means of retaining competitiveness.

As of 2013, the UK was still the most attractive destination for establishing funds; of the €53.6bn of funds raised, around €34.4bn was raised by funds managed in the UK.

While many of the proposed changes – including the ability to remove the fund from the public register, classifying what is regarded as management by LPs, removing capital contributions, and increased protection over LP information – will surely be helpful, especially in terms of reducing administrative burdens, there are question marks over how necessary they are.

When it comes to financial regulation, it is often the case that new rules on top of existing rules can have an adverse effect, and cause more wrong-doing.

Says James Bermingham, director and general counsel of fund administrator Aztec Group: "To make things simpler, they are adding complexity by differentiating between limited partnerships. Adding more definitions to definitions may make the UK regime harder to understand."

Bermingham also notes the proposal to create a list of activities that an investor can carry out without being seen as managing the fund. "Clarifying what LPs can and can't do works both ways, as safe harbours could provide more scope for LPs to interfere in the fund's management, which is not necessarily in the GP's interest."

But for Sally Gibson, partner at law firm Debevoise & Plimpton, while these changes may appear to be mere administration tweaks, they are needed. "In some respects these are just administration changes but they are focused on matters that are fundamentally important. These are things that if you were to wrong foot they would carry consequences," she says.

Separate accounts
Indeed, looking again at the proposal to create a list defining management activities for investors, if an LP was found to be managing the fund it would then be liable for all debts and obligations. And as separate accounts become a more common feature, for those investors demanding individual services, they will likely expect greater control and governance rights compared with other LPs invested in the fund. "Creating a white list for investors would provide more comfort and security," says Gibson.

Furthermore, Gibson believes the proposals will do away with having to explain the odd quirks of the current rules. As it stands, investors coming into a UK fund have to provide a capital contribution on creation of the partnership. "A lot of time is spent explaining to the investors the quirks of the current limited partnership; the requirement to make a capital contribution in order to have limited liability, when for an investor, having limited liability is the most important, most fundamental protection."

Beyond changes to capital contributions and defining what is deemed to be management, the proposal also covers the ability to remove the partnership from the public register and to cut down on the amount of details that need to be registered with Companies House. Says Bermingham: "The ability to move off the register is a useful change, and it is sensible to cut down on the information provided to Companies House, as public disclosures can be sensitive commercially, as well as from a regulatory perspective."

Bermingham goes on to note the oddity of how qualifying limited partnerships in the UK are required to make accounts public and partnerships must complete an annual tax return despite these structures being "tax transparent". "This is not the case with the new Luxembourg limited partnership," he notes.

On the surface the bulk of these proposals seem to focus purely on easing the administrative burden of UK limited partnerships – but these are necessary changes. Having seen little revision in the last 100 years, the UK rules are in need of some fine tuning, as other jurisdictions take steps to increase their attractiveness.

However, to create the perfect, most hassle-free – yet secure – limited partnership in the UK requires a different legislation process that would be far more time consuming and disruptive.

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