A PFLP is a sub-category of the limited partnership, a familiar and popular structure for UK private funds, and both English and Scottish limited partnerships can be designated as a PFLP. Designation as a PFLP allows the limited partnership to benefit from reduced administrative and financial burdens and a clearer regime in relation to the rights that investors can exercise as limited partners without compromising their limited liability status.
Fund managers and investors are becoming more familiar with the designation and the PFLP is swiftly becoming the default option for new UK private fund structures. There are few downsides to applying for the designation where a "traditional" limited partnership is already the preferred structure and the requirements are met. There are, however, certain cases where the intended simplicity of the regime is undermined and imminent reform of limited partnership law may introduce further burdens.
The PFLP was designed for private funds and creates a more flexible vehicle, especially for private equity, real estate and infrastructure fund managers. They have a number of advantages over the "standard" limited partnership vehicle, including: there is no requirement for a limited partner in a PFLP to contribute capital, meaning a participant in a PFLP can fund its commitment solely by way of loan (or can make no contribution at all) ; should investors in a PFLP choose to contribute capital, there is no requirement to register capital contributions (including increases to capital contributions) on the UK company register and the capital can (except as described below) be withdrawn at any time during the life of the PFLP : PFLPs benefit from a statutory "white list" of activities that an investor can undertake without risking their limited liability status (bringing the PFLP regime in line with limited partnership regimes in other jurisdictions, such as Luxembourg and Delaware); and PFLPs are exempt from certain statutory and administrative (including filing) duties.
These are expanded on below.
A new limited partnership can apply for designation as a PFLP on registration, and existing limited partnerships can apply for re-designation as a PFLP at any time. On application for designation or re-designation as a PFLP, the general partner has to confirm that the partnership meets the following conditions (known as the “private fund conditions”):the PFLP is constituted by a written agreement; and the PFLP is constituted by a written agreement; and the partnership is a collective investment scheme (for purposes of s235 of the Financial Services and Markets Act 2000).the partnership is a collective investment scheme (for purposes of s235 of the Financial Services and Markets Act 2000).Once a partnership becomes a PFLP, it will not be able to return to ordinary limited partnership status.
In a “standard” limited partnership, each limited partner is required to contribute capital at the time of its admission. If any of that capital is subsequently withdrawn, the limited partner becomes liable for the debts and obligations of the limited partnership up to the amount withdrawn. If the limited partners in a "standard" limited partnership were to contribute all amounts by way of capital, this would therefore obviously constrain the ability to repay the equity contributions of investors during the life of the vehicle.Typically, this has been addressed by structuring limited partners’ contributions to a limited partnership by way of a nominal (e.g. 0.01%) contribution to capital, with the balance being committed by way of loan. In recognition that this nominal capital structure provides limited protection to the creditors of a limited partnership, the PFLP Order confirms that the limited partners in a PFLP are under no obligation to contribute any capital and are not liable for the debts or obligations of the firm beyond the amount of the PFLP’s available assets.
Note that any limited partnership which was registered prior to 6 April 2017 and is subsequently redesignated as a PFLP does however remain subject to the prohibition on withdrawal, to the extent of any capital contributed prior to its re-designation.
If investors do choose to commit capital to a PFLP, there is no requirement for the amount of capital contributed to be registered on the UK company register. This has the benefit of eliminating filing obligations where, for example, an existing limited partner increases its commitment to a PFLP and in doing so is obliged to contributed further capital.
In our experience, while we have seen PFLPs utilise capital only funding structures, a traditional loan capital split is still employed for many PFLPs. This may in part be explained by a reluctance on the part of managers and investors to diverge from the existing model that has become standard in the private funds industry. Furthermore, a memorandum of understanding (MoU) was agreed between the Inland Revenue (the predecessor to HMRC) and the British Venture Capital Association in relation to the income tax treatment of carried interest arrangements in private fund limited partnership structures. In confirming the capital treatment of carried interest proceeds, the MoU referred to a typical fund structure which assumed a 99.99% / 0.01% loan capital split for investor commitments. While the industry is becoming more accepting that this model is not strictly necessary to ensure capital treatment on carried interest, there has been no subsequent guidance from HMRC and a conservative approach is therefore taken in many cases.
In "standard" limited partnerships, investors may lose their limited liability status and risk becoming liable for the debts and obligations of the limited partnership if they are deemed to become involved in management. As the private funds industry has evolved and investor expectations for controls on governance (particularly in the form of limited partner advisory committees) have become more rigorous, this has given rise to uncertainty as to whether those controls will compromise limited liability status.
The PFLP Order therefore introduced a new statutory “white list” of activities which a limited partner in a PFLP could safely undertake without being considered to be taking part in management. The white list is non-exhaustive, but includes the following activities:
As a sub-category of limited partnership, PFLPs are still governed by the LPA 1907, the Partnership Act 1890 and applicable common law. The PFLP Order acts to exempt PFLPs from some of the applicable statutory requirements.
Limited partners in a PFLP are exempted from the duty to render accounts and information between partners (in section 28 of the Partnership Act 1890) and from the restriction on competing with the partnership (in section 30 of the Partnership Act 1890).
PFLPs also benefit from reduced filing obligations, which are summarised below: