My Lords, the venture capital and private equity industries are important parts of the UK financial services cluster, and the limited partnership structure provided by the Limited Partnerships Act 1907 is a popular vehicle for establishing investment funds in these industries. Currently, approximately 250 fund managers operate some 780 venture capital and private equity schemes in the UK under this structure. This equates to around £142 billion in assets under management, and 20 to 30 new schemes are launched each year. These businesses are important contributors to the UK economy, providing high-wage direct employment and indirect employment through the use of professional services firms, as well as contributing tax take to the Exchequer. The venture capital and private equity industries play an important role in providing funding to start-ups and small businesses and in improving the UK’s productivity.
In 2013, the Government launched their investment management strategy—their comprehensive strategy to make the UK one of the best places globally for asset managers to do business. As part of the investment management strategy, the Government committed to consulting on amendments to the Limited Partnerships Act. While limited partnerships are a popular vehicle for private equity and venture capital schemes, the legislation was not originally drafted with its use primarily as an investment vehicle in mind. Rather, it was originally drawn up to apply to trading entities. The result is that some provisions in the Act are not suitable for the needs of investment funds.
The investment management strategy came at a time when the competing jurisdiction of Luxembourg was updating its own limited partnership regime. Further to this, since 2013, France and Cyprus have also introduced structures to compete with the UK regime. With the UK’s imminent withdrawal from the EU,
there is even more pressure to maintain our status as a leading global financial services hub. Therefore, it is timely and urgent that the UK looks to update its structures for the private funds sector.
The Government propose by way of this order to create a new category of limited partnership, the private fund limited partnership, which will differ from the existing structure in areas that currently create unnecessary administrative burden and legal uncertainty for partners. The existing 1890 and 1907 partnership Acts were originally designed to apply to trading businesses rather than investment funds. When an investment fund is established as a partnership, extensive legal work is necessary, using powers of variation under the legislation, to clarify the respective roles of: the general partners, who are in practice the fund management entities who have wide powers to manage the affairs of a partnership but face unlimited liability in respect of its activities; and limited partners, in practice the investors who have no general powers of management over the affairs of the partnership but have limited liability in respect of its activities, up to an amount specified in the partnership agreement.
The proposed order will introduce a list of activities that limited partners are permitted to carry out without taking part in management, to increase legal clarity for partners on the current state of the law. It will also make some other minor changes to the Act to remove unnecessary administrative burdens for private funds structured as partnerships.
Limited partners in a private fund limited partnership vehicle will not be required to contribute paid-in capital to the partnership. This will make the administration of investments simpler. All capital requirements set out in Financial Conduct Authority regulations will continue to apply. Statutory duties which are inappropriate to the role of a passive investor will be disapplied in a private fund limited partnership. These statutory duties are already generally disapplied through the partnership agreement. The partnership will not be required to advertise changes in the London Gazette, Edinburgh Gazette or Belfast Gazette, with the exception of the requirement to advertise when a general partner becomes a limited partner. Limited partners will be able to make a decision about whether to wind up the partnership where there are no general partners, and to nominate a third party to wind up the partnership on their behalf.
These reforms will reduce administrative and legal costs associated with the establishment of a fund. The updated structure will increase investor confidence in the UK as a jurisdiction for fund domicile. This order will reduce the burden for businesses and make the UK a more attractive jurisdiction for funds. I beg to move.