A major development for the Irish funds industry came to fruition on 23 December 2020 when the President signed the Investment Limited Partnerships (Amendment) Bill 2020 (ILP Bill) into law.
The ILP Bill makes a number of important changes to the 1994 Investment Limited Partnership Act to ensure that Ireland now has a regulated fund offering which is aligned to the commercial requirements of the private equity industry, provides an additional option for other asset classes which require a regulated partnership as a fund vehicle and which adheres to the highest standards in relation to regulation and transparency.
The signing of this Bill into law completes one of the priorities of the Ireland for Finance Strategy, which was focused on building on Ireland’s existing position as a global centre of excellence for funds and securing competitiveness in a dynamic segment of the industry. The Minister for Finance, Paschal Donohoe TD, noted the ILP Bill will:
“allow Ireland to better compete for global private equity investment, with the aim of creating employment and securing Ireland’s reputation as an attractive location for the funds industry, which is subject to a robust and transparent regulatory regime.”
What is an Investment Limited Partnership?
And why was the ILP Bill required?
An Investment Limited Partnership (ILP) is a common law partnership which is regulated by the Central Bank of Ireland (CBI) as an alternative investment fund. It is established and governed by a partnership agreement between one or more general partners, and one or more limited partners. Irish legislation concerning ILPs was first introduced over 25 years ago however there have been relatively few ILPs formed in recent years due to the fact that, although the ILP had many of the common characteristics of an Irish limited partnership (e.g. it is governed by a partnership agreement, does not have separate legal existence, etc.), there were a number of characteristics which meant an ILP was commercially unsuitable for use in a private equity context (where a partnership is normally required). For example:
- Limited partners were only permitted to have certain involvement in the business of the partnership e.g. they could not participate on any investment committee;
- All limited partners were required to agree to any variations to the partnership agreement; and
- Limited partners could become liable for partnership debts in a number of instances.
In many cases, these characteristics rendered an ILP unsuitable as a potential fund vehicle of choice, relative to partnerships which were available in other common EU and other fund domicile jurisdictions. As a result, this reform of the 1994 Investment Limited Partnership Act was necessary to rectify these issues.
What has changed?
The ILP Bill modernises the 1994 Investment Limited Partnership Act, by amending a number of the commercial impediments noted above. Key amendments which have been made include:
- Insertion of an enhanced ‘white list’ of safe harbour provisions which preserve the limited liability status of investors by permitting certain activities to be undertaken without the investor being deemed to be taking part in the management of the ILP. For example, investors are now permitted to serve on any board or committee (e.g. an investment committee) which is established in relation to the ILP.
- Removal of the requirement for all investors to approve amendments to the partnership agreement. Instead such amendments will require approval by a majority of investors (by reference to investor contributions).
- Clarification that limited partners who do not take any part in the conduct of the business of the partnership cannot be prosecuted for any offences committed in the management of the partnership.
- Removal of the requirement on a return of capital to any investor for the general partner to certify that the ILP is able to pay its debts in full as they fall due after the return of capital is completed
In addition to these amendments, the ILP Bill introduces a number of other measures to ensure there is alignment with more recent domestic and EU legislation, such as the Alternative Investment Fund Managers Directive (incl. depositary, valuation, record-keeping and capital withdrawal requirements), the 2014 Companies Act and the 2015 Irish Collective Asset-management Vehicles Act. These measures, which aim to ensure that ILPs represent a “best in class” regulated partnership vehicle, include:
- The ability to establish an ILP as an umbrella fund with multiple sub-funds, the assets and liabilities of which will be legally ringfenced. This provides sufficient flexibility to use separate sub-funds or “compartments” of the same ILP for different investments;
- The possibility for ILPs to be migrated into and out of Ireland by way of continuation, which provides scope to redomicile existing partnerships without significant implications;
- The introduction of beneficial ownership disclosure requirements in respect of 25%+ investors in the ILP, which ensures the transparency of the vehicle adheres to international best practice.
Where does the signing of the ILP Bill leave us?
The use of partnerships as fund vehicles has become increasingly popular in recent years, particularly in the private equity industry. The reason for this is that partnerships allow investors to collectively invest in underlying assets, whilst also ensuring that any income and gains from investment remain taxable at an investor level as if they had invested directly. Given the various commercial drawbacks which had previously existed with the ILP, Ireland was historically normally overlooked as a possible fund domicile for private equity or other asset classes (such as infrastructure or credit) requiring a partnership as a fund vehicle.
Following the signing into law of the ILP Bill, Ireland now has a partnership model which should be commercially viable for private equity and other asset classes that require a fund vehicle which is transparent for tax purposes (an ILP is transparent for Irish income tax and capital gains tax purposes under pre-existing law). The fact that an ILP is regulated and adheres to international best practice from a transparency perspective is likely to appeal to certain investor types such as European institutional and sovereign wealth funds. The ILP adds to Irelands existing range of fund options and it is hoped that the recent passing of this Bill will cement its position as a leading fund domicile.