The law relating to limited partnerships has remained almost unchanged for over 100 years since the Limited Partnerships Act 1907 first entered the statute books. But that has now changed as the old Act has been updated to cater for a new category of ‘private fund limited partnerships’ or PFLPs.
Over recent decades, the English limited partnership has become the preferred structure for large private investment funds. A driving factor in this is their ability to offer their investors the protection of limited liability in return for no involvement in the management of the limited partnership’s business.
Whilst they remain a popular vehicle, some of the quirks of English limited partnerships have caused issues and these, linked with the associated administrative and financial burdens, have led to investment funds seeking alternative solutions, including the use of offshore vehicles. The introduction of the PFLP aims to remove these burdens and attract investment funds back to the UK.
What is a PFLP?
A PFLP is a sub-category of limited partnership and refers to a limited partnership that has been registered or designated as a PFLP.
For a limited partnership to be designated as a PFLP it must be:
- constituted by a written agreement; and
- a collective investment scheme as defined by statute – that is, a vehicle in which profits or income is shared through collective investment and in which the participants have no day-to-day control over the management of the property.
In practice, most UK private investment funds structured as limited partnerships should satisfy these conditions.
The Government has pulled back from its original suggestion of requiring these conditions to be confirmed by a solicitor which would have unnecessarily added to the cost and complexity of registering a PFLP. Instead, the conditions simply have to be confirmed by the general partner on registration of the PFLP.
How do you register as a PFLP?
To register a new limited partnership as a PFLP, you simply have to complete form LP7 and file it at Companies House, together with the relevant fee.
Existing limited partnerships which satisfy the PFLP conditions can also choose to adopt PFLP status by completing and filing a form LP8.
How is a PFLP different to a traditional limited partnership?
The key benefits for a private fund of adopting PFLP status are:
- In a traditional limited partnership, the limited partner investors are prohibited from withdrawing their capital. As a result, their investments were typically structured to include a very small capital element with the majority of their investment being made by way of a loan. For a PFLP, there is no requirement for limited partners to contribute any capital or property to the partnership so these nominal capital contributions are no longer required.
- The limited partners in a traditional limited partnership are prohibited from taking part in the management of the partnership’s business. If they do, they will lose their limited liability status. For PFLPs there is now a (non-exhaustive) ‘white list’ of permitted activities in which a limited partner can take part without losing the protection of their limited liability status. This includes things like approving the accounts of the partnership, reviewing or approving a valuation of the partnership’s assets and discussing the prospects of the partnership business. However, limited partners are not entitled to take actions included in the list if they would not otherwise be permitted to do so by the terms of the partnership agreement – so whether a limited partner is able to carry out one of these activities will depend on the terms agreed in the partnership agreement.
- The partners in a limited partnership, like those in a general partnership, are required to provide accounts and full information of things affecting the partnership to any other partner and to account for profits made in competing businesses. These obligations have been removed for limited partners in a PFLP.
- Finally, the number of administrative filings and notices has been reduced for a PFLP:
- a PFLP does not have to notify the registrar of changes to the nature of the partnership business, changes to the term or character of the partnership or the amount of capital contributed by each partner; and
- any assignment of a partnership interest in a PFLP to another person does not have to be advertised in the Gazette.
Still number one?
With limited partnerships now being used in ways that the legislators could not have imagined back in 1907, the new PFLP status provides a more flexible approach for private investment funds choosing to adopt this structure. Hopefully, the introduction of the new status will again make the English limited partnership, in the form of a PFLP, the number one choice for large private investment funds.
This blog post was written by Zeb Khan. For further information, please contact:
Sophie Brookes, partner, Corporate
T: 0161 836 7823