The proposals would create a new sub-category of limited partnership to be called a private fund limited partnership (PFLP). In broad terms, a limited partnership is capable of being a PFLP if it is subject to a written agreement and it qualifies as a collective investment scheme for the purposes of section 235 of the Financial Services and Markets Act 2000 (FSMA), or would do so but for the fact that the limited partnership falls within an exception under section 235(5)) of FSMA. An existing limited partnership may apply to be a PFLP if it fulfils the requisite criteria. However, once a partnership becomes a PFLP, it will not be able return to limited partnership status.

While the Treasury acknowledged that some of the proposals might be beneficial if applied to all limited partnerships rather than just PFLPs, it felt that any wider application would require further consideration of the risks and effects, so the Treasury is considering the appropriate next steps.

Currently, a limited partner retains limited liability so long as it does not participate in the management of the partnership’s business. There is very little guidance as to what constitutes taking part in management and this issue has always been open to interpretation (although common practice has developed in the private funds industry). The current position is far from satisfactory, particularly given that a limited partner may lose its limited liability for a breach of this provision.

Under the proposals, the general position will not change, however, a safe harbour of permitted activities, known as a white list, will be introduced. The white list will set out a non-exhaustive list of the activities that a limited partner may perform without being considered to be involved in management and therefore without compromising its limited liability.

Although some of the activities on the white list reflect activities that are already generally accepted in the market as not constituting taking part in management, others go further by including activities in respect of which the current position has been unclear. In general terms, the white list is consistent with equivalent safe harbour legislation in other popular investment funds jurisdictions and will, at the very least, bring some much needed certainty to what has been a distinctly vague element of the law.

The current regime requires a limited partner to contribute capital to a limited partnership at the time of its admission to the partnership. To the extent that a limited partner withdraws some or all of that capital, the limited partner remains liable for the capital withdrawn in the event that the partnership requires it to meet liabilities. As a result, limited partners in private funds structured as English or Scottish limited partnerships typically contribute only a nominal amount of capital on admission, with the balance of funding provided by an interest-free loan to the partnership. This capital/loan split results in unnecessary administrative complications when it comes to the admission of limited partners and the ongoing operation of the limited partnership.

The Treasury has decided to remove the requirement for limited partners to make a capital contribution to PFLPs. However, the option for a limited partner to contribute capital to a PFLP will remain and, if capital is contributed, it may be withdrawn without further recourse by the partnership. In relation to capital contributions that have been made to a limited partnership before the implementation of the new regime, the partnership will continue to have recourse against a partner to the extent of its withdrawn capital. These proposals would considerably simplify the admission process and the ongoing administration of the limited partnership.

At present, when a limited partner transfers its interest in an English or Scottish limited partnership, the general partner is required to place an advertisement in the relevant Gazette and, until that notice is published, the transfer is deemed to have no effect. As well as being an administrative burden and an additional cost for the parties involved, the notice requirement causes uncertainty around when a transfer is effective. The proposals would abolish this requirement. Over the past decade, the secondary market in limited partner interests has grown significantly, and so the consignment of this anachronistic piece of legislation to the history books is a welcome development.

An English limited partnership, as distinct from a Scottish limited partnership, does not have separate legal personality, however, in many funds jurisdictions there is the option for a limited partnership to elect to have separate legal personality. There are certain situations in which this is advantageous, for example, where one limited partnership needs to be a limited partner in another limited partnership (that is, a carried interest limited partnership in a main fund). This is, however, technically problematic where neither partnership has legal personality. The proposals would not enable English limited partnerships to adopt separate legal personality because they are being made by way of a legislative reform order, whereas primary legislation is required for such a change. The Treasury has said that it is committed to exploring this issue in the future.

While the proposals intend that the capital contributions made by a limited partner to a PFLP will not need to be declared on the public register, the proposals do not intend to change the requirement to register the names of the limited partners on the public register. Given the general direction of travel in the field of transparency in international investment structures, it is perhaps unsurprising that this requirement was not reformed. As a result, on this aspect at least, the UK limited partnership regime will continue to stand apart from those in several competitor jurisdictions where the register remains private.

The proposals, which are due to be fully operational within a year, are a definite step in the right direction and will establish a limited partnership vehicle that should allow the UK to better compete with other popular private funds jurisdictions. For a fund manager who already favours the UK limited partnership, this will have a materially positive impact on the manner in which its funds are structured and operated. For a fund manager who is less versed in the UK limited partnership model, the proposals may go some way to increase the appeal of the vehicle.

However, there is a sense in the market that the proposals could have gone further: private fund managers have a broad choice of jurisdictions in which to locate their funds, both onshore and offshore, and the fact that the proposals do not address certain key characteristics of limited partnerships in competitor jurisdictions means that there is still a real choice for fund managers in where to establish their funds. It remains to be seen, therefore, whether the UK’s dominance as a location for fund managers and advisers will be replicated in relation to the fund vehicles themselves.