Brexit, Limited Partnerships and the new opportunities for Gibraltar Funds
By James G Lasry, Deputy Chairman, Gibraltar Funds and Investments Association
What a whirlwind 2020 was! The United Kingdom and Gibraltar separated from the European Union (despite the fact that Gibraltar firmly voted to remain within); the world has experienced a profound health crisis the likes of which have not been seen in a century. Nevertheless, Gibraltar’s ability to be innovative and nimble is helping to forge a new path for its developing funds industry.
While Gibraltar was within the European Union, it had an obligation to transpose all EU legislation. This affected the funds industry in 2013 when it transposed the Alternative Investment Fund Managers Directive (AIFMD). The AIFMD unfortunately served as a barrier to funds establishing themselves in the EU. Indeed, this drove many funds out of Europe. Now that Gibraltar and the UK have left the EU and will no longer have access to the European passport, GFIA, together with HM government of Gibraltar, in consultation with the GFSC, has proposed legislation that would make compliance with the onerous requirements of AIFMD optional.
The Limited Partnerships Act 1927
The rules will still remain as part of Gibraltar’s legislation, but funds will be able to opt out of the regime, the logic being that if funds can no longer benefit from the passport, they shall no longer be burdened with the AIFMD. What this means for Gibraltar is that large funds that either do not plan on marketing in the EU, or who are able to use the national private placement regimes in the various member states, can establish themselves in Gibraltar without having to comply with AIFMD. Those funds who wish to remain compliant may certainly do so; in fact, many Gibraltar funds will.
Another one of GFIA’s legislative proposals has been to replace The Limited Partnerships Act 1927 with a new Limited Partnerships Bill, and to enact the Protected Cell Limited Partnership Bill. This is important for private equity, real estate and debt funds that often prefer to be established as limited partnerships because of the tax transparency that those structures afford. The new legislation is probably the most innovative and up to date partnerships legislation in the world. The most important element of the reform is that limited partnerships can now create protected cells that are statutorily segregated from each other. Previously, it was (and remains) possible to establish a protected cell company which could create such cells, but if one wished to establish a fund structure with several different strategies or investment classes as a partnership, one would have to establish several funds. This is unlike a protected cell company, where it is possible to establish those all under the same corporate entity. The economies of scale previously available only to companies will now be available to limited partnerships.
Some partnerships, such as English limited partnerships, do not possess a legal personality; others such as Scottish partnerships do. They can hold property, sue and be sued in their own name as opposed to English limited partnerships in which the general partner must act on behalf of the limited partnership. Under the new Limited Partnerships Bill, the default will be that the partnership possesses a legal personality but the general partner may elect not to have any separate legal personality. This flexibility will allow complex fund structures, that previously would have had to go to several jurisdictions in order to accommodate different types of investors, to remain within the same jurisdiction and save costs.
A classic difficulty with limited partnership funds was always that the limited partners may not be involved in the management of the fund on pain of losing their limited liability status. Limited partners have, for this reason, been hesitant to participate in investor committees or advisory boards, when commercially they would have preferred to do so (as they could in corporate funds). The new Limited Partnerships Bill creates safe harbour rules providing for limited partners to become involved without fear of losing the limitation on their liability.
The new Limited Partnerships Bill also allows partnership interests to be expressed as equity, notes, loans or any other instrument that is issued by the limited partnership.
Although 2020 was indeed difficult, there is every reason to hope that 2021 will be better. That is certainly true for Gibraltar’s fund industry that has managed to capitalise on the strong relationships with the GFSC, HM Government of Gibraltar and industry.