Last Updated February 27, 2019

Law and Practice

Contributed By Travers Smith LLP

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Travers Smith LLP investment funds group comprises four partners and 15 other dedicated fee earners, based in London. The group focuses on funds, investors and intermediaries in the private equity, infrastructure, debt, real estate and listed equities sectors. It has constantly been at the forefront of developing market practice and thought on relevant changes for the investment funds industry, including the European Alternative Investment Funds Managers Directive and, more recently, the potential impact of Brexit. The funds tax group advises on the structuring of investment funds to maximise their tax efficiency for investors and managers. The investment funds group sits alongside the firm’s market-leading private equity M&A practice, one of the largest transactional teams of private equity lawyers in the City. The funds finance practice combines expertise from the firm’s fund formation and finance practices to advise lenders that provide subscription line and other facilities to real estate funds. Travers Smith also advises real estate funds on the borrower side. The investment funds group is best known for private funds and closed-end listed funds.

Brexit will clearly have an impact on fund managers and fund vehicles operating and/or marketing, in the UK. As, at the time of writing, it is not known whether the UK will exit the EU on the basis of a deal and related transition period or no deal, the exact implications are difficult to ascertain.

Were a transition period to be agreed and put in place, the UK would continue to implement new EU investment funds legislation which takes effect during that time. This means that the UK may potentially be required to implement some very significant measures which are currently being negotiated, including resultant legislation from the upcoming reviews of the AIFMD and the PRIIPs regime, in addition to the new legislation relating to the cross-border distribution of investment funds (frequently referred to as the "Omnibus" package).

Those most affected by a no-deal Brexit would be UK full-scope AIFMs relying upon a managing or marketing passport. As the UK will immediately become a third country in the event of a no-deal Brexit, these AIFMs will no longer be able to rely upon passporting regimes and will instead only be able to market under national private placement regimes (NPPR). Full-scope AIFMs established in other EEA member states would no longer be able to manage a UK AIF or to market to UK investors under the AIFM passport in the event of a no-deal Brexit. To address this, the FCA has proposed a temporary permissions regime. Sub-threshold AIFMs will not be affected to the same extent as full-scope AIFMs; having never had access to the AIFM directive passport, they will continue to market under the NPPR. Similarly, non-EEA AIFMs would also continue to market under NPPR.

Post-Brexit, access to equity capital markets for listed funds will be affected. As the UK will no longer be a Member State, UK companies will not be able to raise capital in the EEA using a prospectus approved by the UKLA and "passported" into Europe. However, it is likely that the UK and EU rules will remain largely aligned, and so it is unlikely that different documentation will be needed, at least in the short term. However, where a prospectus is required, this will need to be approved in an EEA state, as well as in the UK.

Post-Brexit, it will become possible for the UK to deviate from EU-mandated tax legislation. However, there has been no indication that the UK will amend its tax legislation as a result of Brexit in ways which are likely to impact significantly on funds in particular.

As to other upcoming changes, the legislation which governs UK limited partnerships (the principal fund vehicles used for UK domiciled private funds), the Limited Partnerships Act 1907, is currently the subject of reform proposals. The proposals have been put forward in response to concerns that Scottish limited partnerships are being used in illegal activities. The UK government has taken the opportunity to consider how effective controls can be built into the entire lifecycle of limited partnerships. The proposals relate to:

  • stronger registration requirements;
  • a requirement that the limited partnership will need to demonstrate that it maintains an ongoing connection to the UK;
  • a requirement for the filing of an annual confirmation statement, confirming that all information on the Register at Companies House is correct; and
  • giving the Registrar powers to strike-off limited partnerships.

In relation to open-ended funds, the FCA has put forward proposals aimed at ensuring adequate liquidity in open-ended funds investing in illiquid underlying assets. Broadly speaking, a fund will be within scope of the proposed new requirements if it is a NURS which invests, or intends to invest, at least 50% by value of the fund’s property in inherently illiquid assets.

From April 2019, non-residents will be subject to UK tax on the disposal of interests in UK land or UK-land-rich entities. The rules contain specific provisions which explain how this new tax charge will apply in the case of investment funds, but these provisions are highly complex and there remains a degree of uncertainty as to how they will be applied in practice. A summary of these new rules is outside the scope of this chapter, but it should be noted that non-resident investors in UK investment funds (particularly real estate funds) may be subject to this new UK tax charge.

Travers Smith LLP

10 Snow Hill
London
EC1A 2AL

+44 20 7295 3000

+44 20 7295 3500

david.patient@traverssmith.com www.traverssmith.com
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Authors



Travers Smith LLP investment funds group comprises four partners and 15 other dedicated fee earners, based in London. The group focuses on funds, investors and intermediaries in the private equity, infrastructure, debt, real estate and listed equities sectors. It has constantly been at the forefront of developing market practice and thought on relevant changes for the investment funds industry, including the European Alternative Investment Funds Managers Directive and, more recently, the potential impact of Brexit. The funds tax group advises on the structuring of investment funds to maximise their tax efficiency for investors and managers. The investment funds group sits alongside the firm’s market-leading private equity M&A practice, one of the largest transactional teams of private equity lawyers in the City. The funds finance practice combines expertise from the firm’s fund formation and finance practices to advise lenders that provide subscription line and other facilities to real estate funds. Travers Smith also advises real estate funds on the borrower side. The investment funds group is best known for private funds and closed-end listed funds.

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