Thought Leadership

Regulation: The path to partnership reform

By Audrey Nangle and Lorraine Rooney
with assistance by Syl O’Byrne

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Reform to limited partnership legislation should make Ireland more attractive as a domicile for private market investments

Ireland remains one of the most popular fund domiciles in Europe, where alternative investment funds and UCITS funds are leading the charge with all-time highs in assets under management across many fund strategies.

But, despite its reputation as a leading European fund domicile, the number of limited partnership alternative investment vehicles (LPs) domiciled in Ireland remains low, with AUM behind those of comparable domiciles.

This is set to change, however, with the implementation of amended LP legislation, contained in the Irish Investment Limited Partnerships (Amendment) Bill of 2019. The bill will make Ireland a more attractive destination for LP structures and facilitate the growing world of real estate, infrastructure, private equity and private debt investment vehicles moving onshore.

Irish regulated LPs are currently established under the Investment Limited Partnerships Act of 1994 (the 1994 act), with unregulated LPs being established under the Limited Partnerships Act 1907 (the 1907 Act). The 2019 bill deals with amendments to the 1994 Act only.

Context

The Irish LP structure, available under the 1994 Act, never caught on and is considered outdated because of restrictions it imposes on general partners (GPs) and LPs. These restrictions render the 1994 Act out of sync with more modern LP structures available in other European countries including Luxembourg and the UK.

The bill addresses the shortcomings of the 1994 Act, incorporating commonplace LP fund structure features of competing fund domiciles, as well as introducing innovations to the LP structure generally. These reforms ensure that Ireland has a fit-for-purpose LP structure – a compelling and credible alternative to offer fund promoters and LPs to participate in an aligned Irish LP investment vehicle.

Key provisions

  • Creation of safe harbour for certain activities: investors will be allowed to engage in a range of protected activities – for example, participate in advisory committees – without losing their limited liability.
  • Amendments to voting rules: a LP agreement will be capable of amendment by majority vote provided that all investors are notified in advance of the amendments and the depositary confirms the change does not prejudice the economic interests of investors.
  • Alternative foreign naming: promoters will be able to translate the LP name into a foreign language (including foreign language characters) for distribution in overseas jurisdictions.
  • Change of general partner: the update in the 1994 Act will allow for the creation of statutory novation of assets and liabilities – simplifying and accelerating a change in GP.
  • Umbrella LP structure: the new legislation will permit the establishment of umbrella fund structures – a single fund composed of multiple, segregated liability sub-funds – that can deploy distinct liquidity, investment strategies and tax classification for investors.
  • Withdrawal/distribution of capital: once enacted, the LP legislation will no longer require the GP to certify that it is able to pay its debts as they fall due, upon the return of capital.

Implications of the reforms

The amended LP structure will change how regulated LPs operate. Most significantly, the alterations to the liability rules increase the commercial appeal of the Irish LP to fund promoters and investors.

Along with the limited liability safe harbour provisions, investors will also have a say in the management of their investments. They will be able to appoint board representatives, serve on advisory committees and participate in the investment process. Investors will no longer be liable for the entire LP liabilities; investor liability will be capped at the level of their capital commitment/investment. Under the 1994 Act, management activity exposed investors to the entire liability of the LP in excess of their individual capital commitment. This will be removed once the bill becomes law.

There are cost savings associated with maintaining an umbrella LP fund structure, with separate sub-fund strategies, as opposed to maintaining numerous LP structures with separate investment strategies.

On an administrative note, the new voting rule provisions will materially boost decision making efficiency for amendments to investment limited partnership (ILP) agreements. Whereas previous changes to ILP agreements and certain investment decisions languished in the approval pipeline, now the practical implementation will move more swiftly.

The ability to use alternative foreign names (and critically foreign alphabets) is a unique feature which increases the distribution, marketing and branding appeal of the Irish LP in markets such as China, Japan and South Korea, This is a coup for fund promoters to attract investors, weighing up their choices, in these jurisdictions.

Opportunities from Brexit

Beyond the changes within Ireland, forces abroad might bolster the appeal of an Irish LP. In the UK, Brexit will lead many LPs to move domiciles to the EU, with Ireland standing to gain. Fresh limited partnership reforms, familiarity of business culture, shared language, a common-law legal system and an advantageous time zone all facilitate an easy switch for those promoters already doing business in the UK.

In a post-Brexit European fund landscape, the Irish LP structure will be the only remaining common law English speaking jurisdiction where English case law LP jurisprudence is persuasive, an important point not to be overlooked from a resolution and litigation perspective.

Review of the 1907 Act

Noting that the 2019 Bill deals solely with regulated LPs, the 1907 Act is also undergoing review. Once both the 1994 Act and 1907 Act have been modernised and aligned, Ireland will be able to compete equally with other fund domicile rivals like Luxembourg. Ireland will continue to provide a service provider network with deep ties to large markets like the US while adding unique appeal to international markets, particularly Asia, as a result of the signing into law of the bill, making it a top destination for all fund structures.

Taken as a whole, the bill, when it comes into law in the first quarter of 2020, will modernise and align the Irish LP fund structure with comparable jurisdictions and showcase Ireland as a fund domicile of choice for private market fund vehicles. Besides the benefits of Brexit, several other factors look set to enable to LP reform to push assets under administration higher in Ireland.

These include the ability for promoters to establish umbrella LPs with segregated liability between sub-funds, greater participation in investment decisions and protection of limited liability for investors. These will be combined with the elimination of administrative voting hurdles to amend the LP agreement and the ability of promoters to brand and market an Irish LP using a foreign name.