By James Lasry, Head of Financial Services and Miriam Bayles, Paralegal, Financial Services, Hassans

Gibraltar has established itself as a dynamic and innovative financial centre, renowned for its robust regulatory framework and its strategic geographical location. This jurisdiction has consistently demonstrated its commitment to enhancing its financial services landscape and in particular its funds and DLT frameworks. One of the most significant developments in this regard in recent years was the introduction of Protected Cell Limited Partnerships (PCLPs), a flexible structure that offers enhanced protection for both investors and fund managers.

The establishment of PCLPs in Gibraltar, formed a part of the progressive legislative measures that Gibraltar took to bolster the funds industry with the enactment of the Limited Partnerships Act 2021 and the Protected Cell Limited Partnerships Act 2021. These Acts were the result of collaborative efforts between Her Majesty’s Government of Gibraltar, the Gibraltar Funds and Investments Association, and the Gibraltar Financial Services Commission with expert guidance from legal professionals. This new statutory framework enhanced the existing legislation by providing a solid foundation upon which Limited Partnerships (LPs) could operate as well as innovatively incorporating the concept of protected cells within those partnerships.

PCLPs are unique

PCLPs combine the traditional features of LPs with the protective benefits of segregated cells as are seen in Protected Cell Companies (PCCs). A PCLP allows for the creation of multiple cells within a single LP, each with its own distinct assets and liabilities. This structure differs from traditional LPs where assets and liabilities are pooled, and PCCs which, whilst offering segregation, do not provide the tax transparency benefits inherent in partnerships. PCLPs are therefore unique in the sense that they are able to provide statutory segregation of assets and liabilities between cells, tax transparency, as well as enhanced investor protection and operational flexibility.

The availability of PCLPs presents several compelling advantages in fund structuring. Fund managers are able to implement multiple investment strategies within a single legal entity, each housed in its own protected cell. This arrangement streamlines administrative processes and reduces costs associated with establishing separate entities for different strategies. As funds structured as PCLPs maintain the tax transparency characteristics of LPs too, income is therefore taxed at the investor level, aligning the economic objectives of many investment structures.

Funds industry and investors

The successful introduction of PCLPs has been a testament to the collaborative efforts between the Gibraltar Government, the Regulator and industry bodies. This partnership ensured that the legislation was meticulously crafted with the funds industry and investors in mind whilst maintaining the integrity and robustness of Gibraltar’s regulatory and legislative environment. The work that went into advancing the framework has been recognised by stakeholders as highlighting Gibraltar’s ongoing commitment and proactive approach to providing innovative and viable legislative solutions to the local financial services sector. The Gibraltar PCLP is an outstanding addition to Gibraltar’s range of fund products. Gibraltar’s size and proactivity have allowed it to come up with a piece of legislation that the vast majority of fund jurisdictions have yet to acquire.

It came as no coincidence that the first PCLP launched in Gibraltar, almost a year after the PCLP Act came into force was a crypto fund; crypto funds operate in an environment that is defined by rapid innovation, significant market volatility and evolving and uncertain regulatory frameworks. They therefore carry unique risks. For these funds, PCLPs offer an equally unique structure with more effective risk management and flexibility:

1. Risk Management

Each cell functions as a separate legal entity, meaning any unexpected losses or liabilities, whether from market swings or security breaches, are contained within the individual cell and do not impact the entire fund.

2. Operational Flexibility

Crypto investment strategies can vary widely and may range from direct asset holdings to lending or staking activities. Within the PCLP framework, funds can operate multiple specialised cells under one umbrella which reduces administrative workload and enables fund managers to tailor operational strategies to the specific requirements of each cell’s activity.

3. Enhanced Investor Protection

If one of the fund’s cells or strategies encounters difficulties or losses, investors in other cells remain insulated from these issues. This builds investor confidence in a market where unexpected disruptions are rampant.

4. Tax Transparency

The economic and tax environment associated with crypto assets is often complex. As PCLPs are tax transparent, gains and losses pass directly through investors, simplifying tax reporting and providing further clarity.

5. Regulatory Compliance

The adaptable nature of PCLPs is increasingly valuable in the crypto sector. Fund managers are able to address new compliance requirements on a cell-by-cell basis in response to changing market conditions or legal frameworks rather than restructuring the entire fund.

PCLPs are likewise ideal for less liquid asset classes such as real estate, private equity, venture capital and token projects as they allow each investment strategy to be compartmentalised into separate cells. As in crypto funds, this segregation means that the risks, liabilities and performance of one cell does not impact the others which is crucial when assets are not easily traded or quickly liquidated. This adds a more nuanced approach for fund managers where each cell can be designed with more operational flexibility. The tax transparency that is afforded through a partnership structure is also especially important for less liquid asset classes where cash flows are irregular, and risks can vary significantly. This allows investors to manage tax implications and risk more effectively as profits and losses pass directly to investors.

The continued use of PCLPs is expected to have a long-term impact on Gibraltar’s funds industry. By offering a flexible and protective structure, PCLPs remain an attractive and ideal option for fund managers and investors considering Gibraltar as a domicile and presents an opportunity for those seeking a jurisdiction that supports innovative investment vehicles. It is a testament that Gibraltar remains committed to enhancing and refining its legislation and maintaining its reputation and position at the forefront of the global funds industry.