This week saw some welcome news for users of UK limited partnerships (including their more modern incarnation: the Private Fund Limited Partnership) – although unfortunately the industry’s relief has to remain somewhat qualified. A long-awaited announcement of the outcome of a consultation on changes to limited partnership law has side-stepped the most damaging of the original proposals, but still leaves a number of unanswered questions.
As we have reported before, the UK government’s continuing deliberations on changes to UK limited partnership law have had a destabilizing effect on Europe’s market-leading fund structure. As long ago as January 2017, the British government said that it was aware that limited partnerships were being used by a small number of people to facilitate criminal activity. Quite rightly, it decided to do something about it, but did not say what. When it consulted on tentative proposals in April 2018, the government caused some consternation among the many law-abiding users of limited partnerships, who urged the government to confirm quickly that it would not make changes that would harm the competitiveness of the internationally recognized structure. The government has spent the intervening period deliberating – without providing the requested assurance – and even now has not spelled out the full detail of its revised law reform proposals.
There is certainly welcome news in this week’s announcement. First, the government has made it clear that, although a UK limited partnership will have to show some ongoing connection to the UK, it will not have to maintain the firm’s principal place of business in the UK. Respondents to the earlier consultation, including many in the private funds industry, argued that one of the benefits of the UK structure was that it allowed a partnership’s principal place of business to be moved outside of the UK after initial registration, making it an attractive option for international businesses. In future, the government says, it will be necessary to demonstrate some link to the UK, but this could be (for example) by engaging the services of an agent that is registered with an anti-money laundering supervisory body and who accepts service of documents for the partnership. That may complicate the administrative arrangements for some firms, but it does not seem overly burdensome. Unfortunately, it is not yet clear how that requirement will apply to existing partnerships, although the government is thinking about “transitional provisions”.
The government has also confirmed that UK limited partnerships will not have to prepare and file accounts on the same basis as UK companies. It said that the case for that had not been made, and any benefits would be outweighed by the burdens. However, there is a reference in the consultation response to “closing gaps” in the existing requirements: it is not clear what that means and, therefore, some level of uncertainty remains.
The government has decided, though, that it will mandate additional transparency requirements. These will include more information to be provided on initial registration of the partnership, and an ongoing requirement to make an annual return to keep that information up to date. In principle, that seems manageable, but some of the information required could be problematic for private equity fund managers. In addition, further work is apparently being undertaken by the government to establish whether to require “beneficial ownership information from corporate partners” that are not already required to provide it. The industry will be keen to get more detail on the implications of those further deliberations.
A requirement for new limited partnerships to be registered by a person who is itself registered for anti-money laundering purposes also seems proportionate and will not hinder most private fund managers that want to create an English or Scottish limited partnership. And – in its understandable desire to clean up the register, and allow the Registrar to strike off partnerships that appear not to be trading – the government appears to have taken on board concerns that limited partners may be at risk of inadvertently losing their limited liability, but it is not yet clear how it will address those concerns. Until that is clarified, the market cannot be sure that the rights of innocent limited partners will be fully protected.
There is some good news to end 2018 for those with UK limited partnerships in their fund structures. But, in a year of uncertainty for many European private equity firms, it is disappointing that even this issue has not been put completely to bed.
Simon Witney is special counsel and Geoffrey Kittredge is a partner at Debevoise & Plimpton.
This is part of a series, European Funds Comment, by Debevoise & Plimpton.