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Why is the proposal of removing the 20-partner limit on limited partnerships important for private equity?

From SJ Berwin: In our view, it is an unnecessary inconvenience to restrict the number of partners to 20 for any type of business.

In the particular case of limited partnerships used as investment fund vehicles, the fund will frequently wish to admit more than 19 limited partners as investors in the fund (as well as having one general partner). In fact, the problem is made worse by the fact that some investors constitute more than one partner in the partnership. For example, where one is admitting a trust with more than one trustee as a limited partner, one has to assume that each of the trustees occupies one of the limited number of slots.

If the fund is using an English or a Scottish limited partnership as its chosen vehicle - which it very often will do - then it will have to find some way of doing so without breaching the 20-partner limit. In some cases, and where there are no other potentially adverse consequences of doing so, the 20-partner limit has caused the fund to utilise a limited partnership formed under the laws of another jurisdiction (such as Jersey, Guernsey or Delaware) where there are no restrictions on the number of partners. In other cases, where there are other reasons to locate in the United Kingdom, the fund may try to deal with the 20-partner limit in one or more of a number of different ways. For example, it may establish parallel partnerships which invest alongside each other pursuant to a co-investment agreement. This will involve substantial additional documentation having to be produced and the establishment and maintenance of more than one partnership (often several) where one partnership would otherwise have been sufficient.

Another way of dealing with the issue is the establishment of a feeder fund vehicle, which itself has a number of investors but which only constitutes a single partner in the underlying fund partnership. Again, there is a need to create additional documentation and establish and maintain additional vehicles and, in any event, this is not always possible: it depends on there being a feeder vehicle available which is suitable for this purpose and which does not give rise to any tax or regulatory difficulties (which is quite unusual).

In addition to the cost and administrative time which the additional structuring creates, the 20-partner limit also gives rise to legal uncertainty. It is in many cases difficult to determine whether one investor will constitute more than one partner: particularly when one is dealing with overseas entities, it is often difficult to identify whether the prospective partner is itself a legal entity or not, and where it is not, one needs to try to determine how many partnership slots that investor will occupy.

This often requires advice from overseas lawyers, and they often find it difficult to give clear advice on the point. Where one is not certain whether one is dealing with a single legal entity or not (or perhaps acts on the basis of erroneous advice received from overseas lawyers and assumes that the investor is a single legal entity) one is taking a risk that the partnership is inadvertently in breach of the 20-partner limit. The consequences of such a breach are not entirely clear, but could potentially be disastrous, particularly in terms of liability and taxation. Of course, the need to establish how many partnership slots are taken by each investor also takes time and legal costs (including the costs of overseas lawyers where the investor is not located in the United Kingdom).

SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Jonathan Blake or Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.

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