Motion to Consider
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.
My Lords, I thank the Minister for introducing this order. As he has outlined, this instrument would enable a limited partnership which is an investment firm to be designated as a private fund limited partnership. It also amends some of the provisions of the Limited Partnerships Act 1907 as they apply to PFLPs and to partners in PFLPs. This change has been in the pipeline for over a decade, since the Law Commission and the Scottish Law Commission published proposals in 2003. In 2008, the then Labour Government published a consultation on limited partnerships. However, in response to the stakeholder responses, the decision was taken that it was not possible to continue with those reforms.
We will not be opposing this order. However, I wish to put a number of questions to the Minister, and perhaps the most sensible place to start is with the Labour Government’s objections. The consultation response in 2009 stated that concerns were raised about particular issues in Scotland, as well as how the order was drafted. I appreciate that the order has undergone revision since then, but have stakeholders raised objections on the instrument in front of us today? Furthermore, has the draft been altered to reflect the concerns raised by funds with client interests in Scotland?
One of the changes made following the latest consultation was the removal of the strike-off procedure. The original proposal would have removed dissolved PFLPs from the partnership register. However, concerns were raised that limited partners would lose their limited liability status. We therefore now have a two-tier system for limited partnerships and PFLPs. What consideration was given to delaying introduction of this instrument until all the cracks surrounding the strike-off procedure are ironed out? The explanatory document promises that the Government will look into further steps that could be taken in relation to this issue “in due course”. Can the Minister say what further steps are being taken and when we can expect to be informed about them? There have been strong concerns raised about the burden that this two-tier system will create.
The Government’s stated aim is to,
“reduce the administrative and financial burdens that impact these funds under the current limited partnership structure”.
However, as the BLP law firm identifies, there is a chance that the reduction in the compliance and administrative burden under the new PFLP regime may be short-lived and may well be replaced by other initiatives to increase accountability for limited partnerships more generally. What measures are included in the instrument to ensure that the Government’s stated aim is achieved?
The introduction of a white list brings with it much- needed clarity on the activities of a limited partner, but there is real concern around whether the Government have achieved the right balance in the role of limited partners in the new PFLPs. The proposed changes allow a limited partner to take part in the committee and to vote on proposals by the general partner, while at the same time maintaining limited liability status. Do not the Government consider that this is an inappropriate power for a limited partner? I would certainly be interested to hear what criteria the Government have used to determine the content of the white list. Getting the balance right is vital, so do they intend to conduct a review of the white list and, if so, to what timescale?
Page 8 of the explanatory document—which I found very helpful as someone coming new to this issue—makes a forceful defence for the reforms, stating that:
“Without such changes to current legislation, the UK risks becoming a less attractive domicile for funds when compared to other jurisdictions”.
That is a strong claim, but I could not see any evidence in the document to support that contention, so I would be grateful if the Minister would address that issue. I would certainly be keen to hear his explanation of the role that PFLPs will be playing in making this a more “attractive domicile”.
Finally, I have two minor technical points. First, the impact assessment states on page 2 that 600 private equity and venture capital fund managers will be affected by this change. However, it states on page 8 that as many as 1,030 could be affected. Which of these figures is correct and what percentage of the current limited partnership landscape does that represent? Secondly, what discussions have the Government had with Companies House, which will be responsible for processing applications by firms wishing to become PFLPs, about the changes being made? Has it requested additional resources to deal with the increased administration costs of these charges? I look forward to the Minister’s response.
My Lords, I am grateful to the noble Baroness for the welcome. To deal first with the typing error on page 2, it should read 250 fund managers, not 600. As I said in my opening remarks, we estimate that there are 250 fund managers managing 780 funds. I shall address some of the other issues that she raised. If I do not cover them all—some of them were quite technical—perhaps I may write to her to fill in the gaps.
She mentioned the concerns of stakeholders and Scottish funds. She is quite right: a range of stakeholders raised concerns which the Government listened to, and we amended the order in several areas in response to their feedback. We took into account the views of Scottish stakeholders, including the Law Society of Scotland, while developing the order. On the broader concern expressed about Scottish limited partnerships being used for fraud, the Government have listened to stakeholders’ concerns and the Department for Business, Energy and Industrial Strategy recently launched a call for evidence on the issue, covering all forms of limited partnerships, including these. The Government are committed to implementing any consequent reforms in respect of private fund limited partnerships, as well as other partnerships.
The noble Baroness asks why we did not postpone the order until we had the results of that survey. Strike-off procedure is an issue for wider limited partnership policy, and any process for removing partnerships from the register would need to apply to both private fund limited partnerships and other forms of partnerships. BEIS recently launched a call for evidence looking at the possibility of limited partnerships being used for criminal activity—a subject I mentioned a moment ago. The call for evidence closes on Friday 17 March, and BEIS will consider what further action is necessary. In answer to her direct question—why did we not wait?—the Government’s view was that it was important to press ahead with this package of amendments now because competing jurisdictions are acting quickly. Luxembourg updated legislation in 2013; France and Cyprus are introducing measures now; and UK withdrawal from the EU makes this reform timely. That is why we decided to go ahead now.
The noble Baroness asked about the white list. It clarifies the existing position for limited partners. It does not extend the activities that partners can undertake. In answer to the noble Baroness’s question, we do not expect to undertake a further review of the white list at this stage, as it is both clarificatory and illustrative. We used the proposals from the Law Commission report of 2003 as a basis for the policy. We consulted the stakeholders on that list and some adjustments have been made—for example, clarification that limited partners cannot wind up the partnerships themselves in any circumstances.
The noble Baroness asked some other questions, and I hope it is acceptable to her and noble Lords if I write to her about them. In the meantime, I commend the order to the Committee.