UK Private Fund Limited Partnership (PFLP)

An Innovative Tax-Transparent Entity for Onshore Funds

The United Kingdom has introduced a new category of limited partnerships known as Private Fund Limited Partnerships (PFLPs). This move aims to sustain the UK’s prominent status as the preferred domicile for private investment funds in Europe. The PFLPs are governed by a simplified regulatory framework to facilitate their use in onshore funds.

UK Private Fund Limited Partnership
Key Features

Key Features of PFLPs include:

• Collective Investment Scheme: PFLPs must operate as collective investment schemes based on a written agreement.
• No Capital Contribution Requirement: Limited partners in a PFLP are not obligated to make a capital contribution to the partnership.
• Appointment of Third Party for Wind-up: Limited partners have the authority to appoint a third party to wind up the partnership if no general partner is available.
• Opt-Out from Partnership Act Duties: Certain duties under the Partnership Act do not automatically apply to PFLPs unless the partners choose otherwise.
• Whitelist for Limited Partner Actions: A whitelist specifies actions limited partners can take without being considered involved in the management of the partnership, preserving their limited liability status.
• Simplified Filing Requirements: PFLPs are exempt from certain filing obligations at Companies House, such as changes to the general nature of the business or notices of limited partner contributions.

Additionally, the background information notes that PFLPs were introduced in 2017, designated under the Legislative Reform (Private Fund Limited Partnerships) Order 2017. They represent a sub-category of the established limited partnership structure, offering reduced administrative and financial burdens. The designation provides clarity regarding the rights of investors as limited partners while maintaining limited liability.

Fund managers and investors increasingly prefer the PFLP designation for new UK private fund structures due to its advantages. However, potential reforms in limited partnership law may introduce additional considerations in certain cases.

UK Private Fund Limited Partnership
Principal Features and Advantages

Statutory “Whitelist”: PFLPs benefit from a statutory whitelist, outlining activities that investors can undertake without jeopardizing their limited liability status. This aligns the PFLP regime with similar limited partnership regimes in jurisdictions like Luxembourg and Delaware.

Exemption from Certain Duties: PFLPs are exempt from specific statutory and administrative duties, including filing obligations.

Capital Contributions

In a standard limited partnership, capital contributions are typically required at admission. Withdrawal of such capital can render the limited partner liable for the partnership’s debts up to the withdrawn amount. The PFLP Order confirms that PFLP limited partners are not obligated to contribute capital, and their liability is limited to the PFLP’s available assets.

However, limited partnerships registered before April 6, 2017, and later redesignated as PFLPs remain subject to the prohibition on withdrawal, covering capital contributed before redesignation.

If investors do contribute capital to a PFLP, there is no requirement to register the amount on the UK company register, eliminating filing obligations. While some PFLPs use capital-only funding structures, many still adopt a traditional loan capital split.

Permitted Activities for PFLP Limited Partners:

Permitted Activities for PFLP Limited Partners:

Standard limited partnerships may jeopardize limited liability if investors are perceived to be involved in management. To address this, the PFLP Order introduced a statutory whitelist of activities that PFLP limited partners can undertake without being considered involved in management. Examples include decisions on partnership terms, appointing a person to wind up the partnership, providing surety, and participating in decisions about changes to the partnership’s management.

Legal Obligations for a Partnership in the UK

A business partnership lacks legal status and represents a simple contractual arrangement between two or more individuals aiming to collaborate. The sole legal prerequisite is the registration of the partnership with HMRC, coupled with each partner’s obligation to register for self-assessment and fulfill an individual tax return.

Do managers or advisers to Alternative Investment Funds need to obtain licenses, authorization, or regulation from a governing body?

The FCA is responsible for authorizing and regulating individuals engaged in “regulated activities” in the UK. Serving as the manager of an AIF constitutes a regulated activity, encompassing the establishment, operation (which includes management), or winding up of a CIS. Thus, an appropriately authorized individual must be designated to perform these activities on behalf of an Alternative Investment Fund.

Breach of this requirement is a criminal offense. Any agreement entered into by an individual carrying out a regulated activity in violation of this provision is unenforceable against the other party. The other party has the right to recover any funds paid and seek compensation for any ensuing losses.

The UK AIFMD incorporates a partial exemption for AIFMs whose total assets under management fall below certain thresholds. These sub-threshold firms are not obligated to adhere to the complete provisions of the UK AIFMD, unlike their “full scope” AIFM counterparts.

The applicable thresholds include:

• €500 million, provided the AIF is unleveraged, and investors lack
  redemption rights for the initial five years; or
• €100 million, encompassing assets acquired through leverage. Sub
  threshold firms must transition into a “small authorized AIFM” or, under specific circumstances, a “small registered AIFM.” The latter category imposes the least regulatory burden but is only accessible to certain internally managed AIFs and specific types of real estate schemes.

Are Alternative Investment Funds themselves obligated to secure licensing, authorization, or regulation from a governing body?

In the current UK framework, as a general rule, an Alternative Investment Fund (AIF) is not mandated to obtain authorization or licensing from the FCA. The UK Alternative Investment Fund Managers Directive (AIFMD) and the regulatory framework applicable to Collective Investment Schemes (CIS) generally affirm the traditional stance that it is the operator or manager (AIFM) of the AIF, rather than the AIF itself, that falls under regulatory oversight. However, if the UK AIFMD is applicable, the AIFM must adhere to specific requirements that subsequently impact the AIF. These requirements encompass the appointment of a depositary for the safekeeping of designated assets, organizational controls concerning risk management, liquidity, and valuation, adherence to conduct of business rules, and compliance with regulations pertaining to companies in which the AIF holds a substantial stake.

Does the regulatory framework differentiate between open-ended and closed-ended Alternative Investment Funds, or distinguish between various fund types or strategies (such as private equity versus hedge funds), and if so, how?

Broadly speaking, the UK regulatory framework does not make a clear distinction between open-ended and closed-ended private funds. However, it is worth noting that the partial exemption from UK AIFMD for sub-threshold AIFMs may be more pertinent to non-leveraged, closed-ended funds.

Additional regulatory requirements applicable to managers of Alternative Investment Funds are associated with the pursued investment strategy, rather than the fund’s open-ended or closed-ended nature. While the specific strategy may be linked to a particular fund type, regulations governing market abuse and insider dealing, for instance, are particularly relevant to firms engaging in investments in listed financial instruments.

Limited Partnerships Act, as recently amended

The revised Limited Partnerships Act outlines that a limited partnership can be identified as a private fund limited partnership (PFLP) if it is established through a written agreement and qualifies as a collective investment scheme, as defined in section 235 of the Financial Services and Markets Act 2000 (FSMA). The collective investment scheme involves arrangements related to any form of property, including money, with the purpose or effect of enabling participants to partake in or receive profits or income from the property’s acquisition, holding, management, or disposal, or from sums derived from such profits or income.

The stipulations require that participants lack day-to-day control over the managed property, regardless of their right to be consulted or provide directions. Furthermore, the arrangements must exhibit either or both of the following characteristics: (a) pooling of participants’ contributions and profits or income for payments, and (b) property management as a whole by or on behalf of the scheme operator.

Exceptions under section 235(5) of FSMA do not impact the definition of a collective investment scheme for designating a limited partnership as a PFLP. Therefore, consultation with the Orders made under that subsection is unnecessary.

PFLP status is exclusive to private investment funds. The PFLP structure is not open to partnership schemes authorized for promotion to retail customers under Part XVII of FSMA.

TBA services

TBA & Associates offers comprehensive assistance for the full registration and operational setup of your UK Private Fund. Our legal team ensures all necessary procedures are handled, providing initial arrangements for your Private Fund Limited Partnership Agreement as part of our services.

For inquiries or assistance in establishing your UK PFLP, feel free to contact us, and we will promptly provide the support you need.