Mid-market stays loyal to English limited partnership

The English limited partnership fund structure rose to popularity in the 1980s, as leveraged buyout funds emerged in Europe. The structure afforded LPs limited liability and tax transparency, and was supported by a robust body of precedent surrounding the 1907 Limited Partnership Act, making it commonly used among European investors. Recently, however, market participants have seen a shift away from the vehicle, generally towards Luxembourg.

The shift could be attributed to the introduction of the AIFMD regime, which allows EU-domiciled funds to be marketed to investors throughout the EU. While UK-domiciled funds still benefit from a marketing passport at the time of going to press, a no-deal Brexit would revoke this privilege. However, Fried Frank's Kate Downey, head of European private equity funds, says: "Brexit has created uncertainty, but I do not think it has necessarily been a fundamental reason for the shift away from the English limited partnership."

The more likely driver is the introduction of the Luxembourg SCS and SCSp structures, which came into force in 2013. When deciding where to domicile funds, the most important consideration is what LPs prioritise. Proskauer partner Kate Simpson says: "Most investors want tax transparency and a structure they are used to, which is normally the limited partnership." The Luxembourg limited partnership vehicles offer tax transparency with similar documentation to the English limited partnership structure in an EU jurisdiction. Many European investors have historically looked at the English structure unfavourably, so a strong EU-domiciled alternative is attractive to GPs.

Rule Britannia
However, for many UK-based fund managers, the English limited partnership continues to be the vehicle of choice. Unquote Data tracked the domiciles of 148 UK-based buyout funds announced or registered from 2015 to 2019. The percentage of funds domiciled in the UK rose to 53% from 47% in 2018. James Duffield, head of business development at Aztec Group, says: "The English limited partnership is as popular as it was before the referendum."

Over the time period researched, only one firm switched from the English LP to Luxembourg. Volpi Capital Fund I, which closed on €185m in April 2018, was structured as an English LP in 2016. The fund registered its second vehicle as a Luxembourg LP in October 2018.

The benefits that attracted firms to the English limited partnership are still offered by the structure. Fried Frank's Downey says: "The English limited partnership is simple, easy and inexpensive to set up. It sits in a robust legal framework with a strong body of precedent surrounding it. For a lot of firms there's no reason to deviate."

The UK's Legislative Reform (Private Fund Limited Partnerships) Order 2017 (PFLP) has also addressed common difficulties that investors previously had with the English limited partnership. The law introduced an extensive whitelist of activities LPs can use to negotiate oversight rights without fear of losing their limited liability.

PFLP also removed the requirement that capital be returned at the end of the life of the partnership, removing the need to loan LPs their own returns to them. Proskauer's Simpson says: "PFLP has been helpful. Most of our clients are ticking that box because it takes away those uncertainties for their investors, such as the lack of the whitelist."

While far fewer UK-based fund managers domicile their funds in Luxembourg, the funds that are domiciled there are much larger. The aggregate value of capital raised by the UK-domiciled funds is £18bn, compared with the value of Luxembourg-domiciled funds of almost £22bn.

Simpson says: "Smaller launching funds might stay onshore or go to the Channel Islands because they may feel the cost will be more manageable. Larger funds with better infrastructure could already have a Luxembourg setup so moving there will not cause disruption."

While many of the larger UK-based firms have chosen to domicile their funds in Luxembourg, the UK mid-market funds will continue to domicile their funds close to home. Downey says: "I do not think the gradual shift will continue away from the English limited partnership. People using the structure now will not need or want the excessive cost or regulatory burden of going elsewhere."

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• Topics
• Fundraising
• Advisory
• UK / Ireland
• Fund structuring
• United Kingdom
• Proskauer
• Luxembourg