As some of you might have read, the UK limited partnership legislation is going to be significantly amended soon.
For this purpose, back to 23 July this year the UK Government released a consultation paper aiming at collecting proposals from PE/VC practitioners.
More importantly, the UK Government warns a change is necessary so to “maintain and enhance the UK’s competitiveness as a centre for fund domicile and to minimise costs to investors”.
The changes should introduce a new fund vehicle, most probably a private fund limited partnership, whereas the UK “traditional” limited partnerships, complying with this new vehicle’s requirements would benefit from a more flexible LP regime.
As reported in the consultation paper, one of the reasons for this change is that new and more flexible legal frameworks have been introduced in other investment funds’ domiciles, relatively recently (e.g. the Special Limited Partnership in Luxembourg).
By way of recollection, the limited partnership is one of the most common investment vehicles for private equity and venture capital – also it is one of the eldest legal frameworks in the UK, since in force as from 1908.
The Proposed Amendments
The most relevant amendments would have a sound impact on (i) the extent of limited partners’ participation to the LP management and on (ii) repatriation of investments’ proceeds during the life of the LP.
In fact, for the time being, there are grey areas regarding actions limited partners can effectively take in order to not jeopardize their limited liability (namely taking part to the LP management would trigger the loss of such limited liability). The amendments should provide for a white list of permitted activities that would not be deemed as management – such list would be considered as “non-exhaustive”. We reckon a good degree of flexibility here.
Also the current legal framework prohibits limited partners to repatriate any investment proceeds throughout the LP’s life cycle. The idea on the table is to abolish the prohibition on returns of capital. This is quite powerful – especially as from a practical perspective. Currently, the only solution for limited partners has been to subscribe to loan agreements issued by the LP, instead of contributing capital.
Other proposed amendments entail the removal of the obligation to publish notices on transfers in the official Gazette as well as an enhanced flexibility on the administrative burden for limited partners (also providing a reduction of costs’ intensity).
The UK Government closed their consultations on 5 October. We will follow up on this legislative reform order to come into force.
The role of other jurisdictions – a comment on the role of Luxembourg
As previously said, other jurisdictions (e.g. Jersey, Guernsey, Luxembourg, Cayman, Delaware) have influenced the decision of the UK Government to take initiative for a change.
More specifically, there is no doubt Luxembourg has been a decent inspiration to UK LPs amendments.
Basically, the Special Limited Partnership introduced by the AIFMD Law back to 12 July 2013 displays all the proposed new features the “updated” UK LP is going to have.
In this respect, some might say Luxembourg has played the role of Goliath against the Giant.
By introducing a very ambitious vehicle for private equity and venture capital investments, the Grand Duchy had topped the UK, one of the favourite investment funds’ domiciles in the EU, and risked becoming the most flexible jurisdiction when it comes to alternative investment funds.
If the above-mentioned amendments will be implemented as proposed, the UK should ascend back to their throne as the AIFs’ domicile of choice.
As the French would say “il faut remettre l’église au milieu du village”.
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