All change - the review of Irish limited partnership law in 2019 should be good news for private fund managers

The private funds industry in Ireland is likely to see new opportunities as a result of potentially significant changes to Irish limited partnership law in 2019, offering enhanced flexibility both for AIFs established as regulated investment limited partnerships and those structured as unregulated 1907 limited partnerships.

This updates the elexica article published on 31 January 2019, before publication of the Investment Limited Partnerships (Amendment) Bill.

Introduction

The Irish government’s publication of the Investment Limited Partnerships (Amendment) Bill (the Bill), together with the Department of Business, Enterprise and Innovation’s (DBEI) consultation paper, “Review of Limited Partnerships Act 1907”, which ran from January to March 2019, mean that significant changes are afoot for both Irish investment limited partnerships (ILP) and limited partnerships (1907 LP).

The proposed changes to the ILP will increase the flexibility available under the current ILP rules, bringing these more into line with similar structures in other international fund domiciles. The result should be to make the ILP and Ireland more attractive to private fund managers.

The work in respect of the 1907 LP is at a less advanced stage but it is hoped that the outcome of the consultation will be a positive step towards Ireland being able to offer a “best in class” limited partnership structure for managers seeking either a regulated or an unregulated structure.

ILPs

The ILP is a regulated Irish fund structure which takes the form of a common law partnership. It is authorised and regulated by the Central Bank of Ireland (CBI).

ILPs are constituted by a limited partnership agreement (LPA) and do not have legal personality. Each ILP must operate through a general partner (GP). The LPA is entered into between the GP and the investors of the ILP, ordinarily by way of a separate subscription agreement pursuant to which each investor provides authority to the GP to sign the LPA on their behalf. Upon admission of the investors as partners of the ILP, each such investor will become a limited partner (LP) of the ILP.

To date relatively few private funds have been set up as ILPs despite such structures being available in Ireland since the adoption of the ILP Act in 1994. Following discussions between the Irish funds industry, the CBI and the Irish Department of Finance, many of the perceived shortcomings associated with the ILP structure are now being addressed by the publication of the Bill.

The Bill proposes a number of positive changes to the ILP Act. These include:

  • Modernising and improving the operation of ILPs. So, for example:
    • safe harbours would expressly clarify that certain actions which an LP takes (such as taking part in advisory committees in respect of the fund’s investments, or voting on a change to the LPA) will not lead to the LP losing its limited liability status
    • confirming that, other than as provided for in the LPA, an LP is not liable make any capital contribution to the ILP (reinforcing that investors should not be liable for any partnership debts or obligations beyond their committed capital)
    • new provisions to make it easier to replace a GP, including the creation of a statutory novation of assets and liabilities when a GP is substituted, with these vesting in the incoming GP without the need for further formalities.
  • Bringing the ILP Act better into line with the AIFMD and other EU legislation, including:
    • the amendment of existing requirements to better align these with EU standards, for example, in respect of depositary and valuation functions under the AIFMD
    • modernising capital withdrawal requirements to reflect those under the AIFMD and those applicable in respect of other Irish regulated investment funds updating registration and record keeping requirements for ILPs to bring these into line with international standards
    • aligning timeframes around the dissolution of an ILP with the requirements of the Central Bank.
  • Permitting an ILP to register an "alternative foreign name" - this is intended to assist an ILP which is operating in a non-English speaking jurisdiction (non-English characters may also be used) to have official recognition of a translated name in that jurisdiction.

The Bill is expected to be presented to the Irish houses of parliament and proceed to second stage of approval prior to the parliamentary Summer recess, with the Bill being enacted at some point during the course of 2019. It is also expected that a separate statutory instrument will be adopted in conjunction with the enactment of the Bill which will permit the migration to Ireland of non-Irish limited partnerships by way of continuation. The Irish Funds industry is currently engaging with the CBI in anticipation of enactment of the Bill in order to make appropriate amendments to the CBI AIF rulebook.

1907 LPs

Like the ILP, the 1907 LP is a common law partnership and formed by the execution of an LPA between at least one GP and at least one LP. However, the approval of the CBI is not required to form and operate a 1907 LP. A key attraction of the 1907 LP is that it operates outside of the broader AIFMD ambit, albeit that the appointment of an alternative investment fund manager (AIFM) is required.

A 1907 LP is not subject to regulation, is very cost effective to establish and maintain and has similar features to the ILP as well as to limited partnerships in other jurisdictions. A 1907 LP, for example, does not have legal personality but must act through its GP, which may be an individual or a company.

While the GP is liable for all the partnership debts and obligations, the liability of an LP is limited to the LP’s unpaid capital commitment. This limited liability is, though, subject to the LP taking no part in the management of the business of the 1907 LP - a number of “safe harbour” actions exist, which an LP can take without being considered to be taking part in the management of the business.

The Irish governmental authority for a 1907 LP is the Companies Registration Office (CRO). Currently, each 1907 LP must make a filing with the CRO to safeguard the limited liability of its LPs. If such a filing is not made, the 1907 LP will be considered a general partnership - each of its LPs would be considered to be a GP of the 1907 LP and, accordingly, liable for the partnership’s debts and obligations.

The DBEI consultation paper in respect of the 1907 Act seeks views on the general fitness for purpose of this Act.
As the 1907 Act is the same piece of legislation pursuant to which UK limited partnerships are established, the changes made to the equivalent acts in the UK since Irish independence and also more recent amendments recently considered in the UK are expected to be of particular relevance and importance in respect of this consultation. The consultation period closes on Friday, 01 March 2019.

The consultation asks stakeholders to comment on a range of high-level questions, including:

  • the perceived benefits of limited partnerships for the Irish economy
  • what might explain the rise in registrations of 1907 LPs from around 1,100 in 2015 to over 2,500
  • whether 1907 LPs should be required to submit an annual return to the Registrar of Companies and/or financial statements to the CRO
  • whether 1907 LPs should be required to maintain a principal place of business and a registered office in Ireland
  • whether the Registrar should be given the power to remove and strike 1907 LPs off from the register.

The expectation is that this consultation will lead to an overall review of aspects of the 1907 Act and the consequential updating of its provisions, allowing greater flexibility to limited partnerships formed under it.

Marketing Passports

One of the key benefits of both the ILP and the 1907 LP is the ability of such structures to access pan-European marketing passports.

Whilst the AIFM marketing passport is well publicised, the marketing passport provided pursuant to the European Venture Capital Fund Regulation (EuVECA) should not be disregarded, in particular by smaller managers. Unlike the AIFM marketing passport, the EuVECA marketing passport is also available to registered AIFMs, being those managers which are not required to seek authorisation pursuant to, or comply with the full provisions of, the AIFMD on the basis that the assets under management of such a manager does not exceed €100m, or €500m if the funds managed by the manager are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment. These thresholds are ordinarily calculated on the basis of drawn down capital commitments, rather than the total capital commitment including undrawn capital commitment. In addition, the permitted target investors under the EuVECA passport regime is also broader than the AIFM marketing passport in that, in broad terms, high net worth individuals may also be marketed to.

Conclusion

While the steps to amend the ILP Act and the 1907 Act are at different stages (and mindful that the legislative timetable in 2019 is less certain than usual given the possible impact of Brexit), the revisions which seem likely to further bolster Ireland’s reputation as a highly attractive and competitive location in which to establish investment funds.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.