UK clarifies permitted relationships between LPs and GPs

The UK government introduced long-awaited changes to the limited partnership act in April, designed to bring UK law into line with other major fund jurisdictions. Limited partners will now be able to elect whether to become subject to rules surrounding private fund limited partnerships (PFLP), which will clarify their relationship with GPs in a number of ways. The move will set a new standard for regulation surrounding UK-domiciled funds, potentially rendering them more attractive to international investors that have previously not invested in such vehicles.

"Limited partnerships have been governed by an act that was implemented in 1907 and hasn't really changed much since then," says Ed Hall, a partner in the private equity team at law firm Goodwin, and member of the legal and accounting committee at the British Private Equity & Venture Capital Association (BVCA). "Although [UK partnerships] run very well as fund vehicles, there have always been some aspects of the original act that either add complexity or are just not suitable for every kind of structure."

Changes to the act were originally proposed in a report by the Law Commission in 2003, explains Hall, which sought to modernise limited partnership law to render it suitable for the 21st century. These were taken up again by the UK's treasury in 2013 to maintain the competitiveness of the UK asset management industry and BVCA has been working with the treasury since then to help bring them to fruition.

Although [UK partnerships] run very well as fund vehicles, there have always been some aspects of the original act that either add complexity or are just not suitable for every kind of structure" – Ed Hall, Goodwin

Most prominent among these reforms is the introduction of a white list of actions limited partners are permitted to take without jeopardising their limited status, which could otherwise render them liable to legal actions related to portfolio companies. In particular, LPs that make deal-by-deal investments or appoint representatives to a fund's advisory board will now have clear guidelines as to what actions they are able to take that do not constitute management activity. This therefore makes clear how to avoid being classified as general partners in the eyes of the law.

"There have really never been any guidelines at all around what 'taking part in the management' of a partnership means," says Hall. "People have become comfortable with the concept in a standard private equity fund where investors really do not take part in the management. However, in other structures – such as pledge funds or structures where investors take more of a hands-on role – people have tended not to use UK limited partnerships. This non-exhaustive list opens up the use of UK limited partnerships, which are a very popular structure, for a wider range of approaches without investors incurring risks."

Fingers in pies
Additionally, the changes have removed complexities and certain restrictions that previously might have rendered funds unattractive to LPs unfamiliar with UK limited partnerships. The original 1907 act stipulated limited partners were not allowed to own stakes in multiple competing businesses – a scenario that is all but unavoidable when making commitments to numerous PE funds – without specific legal documentation allowing them to do so. This stipulation has now been removed.

Furthermore, investors previously had to make capital commitments to a fund in order to be classified as LPs. However, GPs were unable to make capital repayments to LPs until the end of a fund's life. In order to compensate for this, LP commitments typically took the form of a nominal capital contribution with the remainder provided in the shape of a loan. GPs could then make loan repayments to LPs in order to provide liquidity for investors.

The new regulations remove both of these aspects, meaning LPs can choose to make their commitments entirely in the form of a loan or capital. Capital or loan repayments can then be provided over the course of a vehicle's lifespan, bringing UK limited partnerships into line with other jurisdictions.

Whether such changes will have a material effect on UK onshore vehicles' ability to raise capital from overseas investors remains to be seen. However, the changes are certain to bring UK fund structuring more in line with competing jurisdictions.

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• Topics
• Regulation
• UK / Ireland
• LPs
• GPs
• United Kingdom
• BVCA
• UK limited partnership