Dawn of a New Age for Irish Investment Limited Partnerships

What is an Investment Limited Partnership?

An Investment Limited Partnership (“ILP”) is a regulated common law partnership structure. ILPs are tailored specifically for investment in a collective investment fund. While it is possible to establish a private fund as a corporate structure, such as an Irish Collective Asset Management Vehicle (“ICAV”) or plc (or indeed as a unit trust or common contractual fund), investors and managers of private funds often prefer a limited partnership structure for this particular asset class.

What is the Investment Limited Partnership Act 1994?

In Ireland, the Investment Limited Partnership Act 1994 (“ILP Act 1994”) provides for the establishment of a regulated ILP structure. An ILP authorised under the ILP Act 1994 can be used as a structure for an alternative investment fund (“AIF”): an AIF, which is managed by a manager authorised under AIFMD, can be marketed throughout the EU under the AIFMD marketing passport.

What are the main features of an ILP under the ILP Act 1994?

An ILP is constituted pursuant to a limited partnership agreement (“LPA”) entered into by one or more general partner(s) (“GPs”) on the one hand and any number of limited partners (“LPs”) on the other hand. An ILP must be authorised by the Central Bank of Ireland ("Central Bank") (but benefits from the Central Bank’s 24-hour approval process) and is, therefore, a regulated fund vehicle, which can be attractive to certain investors.  Significantly, from a manager and investor preference perspective, the ILP is tax transparent.

An ILP is not incorporated and all of its assets and liabilities belong jointly to the partners in the proportions agreed in the LPA. Similarly, the profits are directly owned by the partners also in the proportions agreed in the LPA.

The GP is responsible for managing the business of the partnership and, as an ILP does not have power to enter contracts in its own name, the GP usually enters into contracts on its behalf. The GP is also liable for the ILP’s debts and obligations: an LP’s liability in this respect is generally limited to the value of the capital it contributed or which it has undertaken to contribute, save where the LP takes part in the conduct of the business of the ILP (an issue which the proposed “safe harbours” mentioned below are designed to, in part, address).

What is the purpose of the Act?

The Act is intended to update the legal framework applicable to regulated limited partnerships set out in the ILP Act 1994, in order to reflect changes in the global private funds market, both in terms of the modernisation of the Irish ILP structure and in terms of applicable EU legislation. The updated framework will also contribute to achieving the Government’s aim to make Ireland a global location for private equity funds, as set out in “IRELAND FOR FINANCE - Strategy for the development of Ireland’s international financial services sector to 2025”.

What are the key amendments set out in the Act?

For the purpose of modernising the legislative framework applicable to ILPs, the Act introduces a number of “safe harbours” for LPs, thereby allowing them to participate in advisory committees, vote on changes to the LPA and engage in other related activities without losing their limited liability status. It also:

• allows an ILP to be established as an umbrella fund, with segregated liability between sub-funds;
• modernises existing legislative references to take account of AIFMD, MiFID II and other EU legislation which now forms the primary basis for regulating the responsibilities and conduct of AIFMs, depositaries and other key service providers to an ILP;
• facilitates amendments to the LPA by allowing alterations to be made; a) in writing via the agreement of a simple majority of partners, provided the existing partnership agreement allows for changes via majority, and/or b) if the depositary certifies that the proposed amendments do not prejudice the interests of LPs and certain other requirements are fulfilled;
• creates a statutory transfer of assets and liabilities on the admission or replacement of a GP, so that all rights or property of the ILP vest in the incoming partner or existing GPs;
• stipulates that if the LPA provides that where a partner fails to perform any of its obligations under or otherwise breaches the partnership agreement, the sanctions applicable for the failure of performance or breach will not be unenforceable solely because they are penal in nature; and
• allows for the migration of non-Irish LPs to Ireland by way of continuation.

What difference will the Act make?

The amendments to the ILP Act 1994 greatly enhance the attractiveness of the ILP structure for private equity managers and investors. The ILP can be structured to suit all major investment strategies and is a suitable vehicle for all types of private fund or real asset strategies such as private equity, real estate, venture capital, infrastructure, credit and loan origination. Hedge fund managers may also find the Irish ILP an attractive vehicle. Significantly, ILPs are not subject to legal risk spreading obligations, making them suitable for single asset funds and/or funds with highly concentrated positions.

Does the General Partner of an ILP need to be separately authorised by the Central Bank as an AIF Management Company?

No: the General Partner of an ILP does not require separate authorisation as an AIF Management Company, according to the Central Bank’s recently updated AIFMD Q&A. According to the Q&A, while the General Partner of an ILP has statutory functions relating to its authority to conduct the business of the ILP, and is a regulated financial service provider, meaning that its directors are subject to the Central Bank’s fitness and probity regulations, it will not otherwise be authorised by the Central Bank.

What else does the Act cover?

In addition to amending the ILP Act 1994, the Act also extends anti-money laundering beneficial ownership requirements to both ILPs and common contractual funds as well as making some technical amendments to the ICAV Act 2015 to enhance the efficiency of the structure and align it with the Companies Act 2014, where relevant.

What other regulatory changes are expected?

Since ILPs are regulated by the Central Bank, it is also necessary to amend certain provisions of the Central Bank’s AIF Rulebook in order to facilitate the amendments made under the Act and to clarify certain provisions in relation to all closed-ended fund structures more generally.  On 22 November 2020, the Central Bank published a consultation on the establishment of regulatory guidance in relation to the scope of permissible features for share classes of closed-ended Qualifying Investor AIFs (“CE QIAIF”) which generally use private equity type strategies or invest in illiquid assets (the “Guidance”). The proposals included in the Guidance will involve:

1. permitting a CE QIAIF to issue shares at a price other than net asset value without prior Central Bank approval;
2. setting out the conditions applicable to the use of excuse (which enable an investor to be excused from an investment that the CE QIAIF proposes to make) and exclude provisions (which permits the CE QIAIF to exclude an investor from a proposed investment that the CE QIAIF proposes to make);
3. permitting new investors to acquire shares in the CE QIAIF at a later stage in its life cycle (stage investing); and
4. allowing the establishment of management share classes which permit portfolio managers of a CE QIAIF to participate in investments of the CE QIAIF, including on the basis of conditions which differentiate the share class from other share classes in the CE QIAIF.

The changes proposed by the Guidance, once adopted, will be reflected in the Central Bank’s AIF regulatory framework, thereby facilitating the regulatory changes required under the new ILP regime. However, although the proposed amendments are being introduced on foot of those ILP regime changes, the Guidance extends to all closed-ended fund structures, not simply ILPs.

Whilst the Guidance is in a consultation process and the Central Bank is expected to consider responses from all interested stakeholders as part of that process before settling its position, it is anticipated that the proposals will be implemented into the Central Bank’s rules materially in the form communicated within the Guidance.

It is expected that the Guidance will be introduced shortly, thereby paving the way for managers to establish ILPs and other forms of private funds in the New Year.

Are there any other changes coming down the track for Irish limited partnerships?

The Irish Government is also planning to review the Limited Partnerships Act 1907 (“1907 Act”), which provides for the unregulated limited partnership structure. In this respect, the Department of Business, Enterprise and Innovation published a consultation in January 2019, seeking views on the 1907 Act. While not authorised by the Central Bank, certain limited partnerships established under the 1907 Act fall within the AIFMD regulatory regime. Updating and modernising the 1907 Act will increase the attractiveness of such partnerships, and ensure that both regulated and unregulated investment limited partnerships are subject to an appropriate regulatory framework.