Last Updated February 27, 2019

Law and Practice

Contributed By Travers Smith LLP

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.

Private closed-ended Funds

The typical structure of a UK private equity or venture capital fund is most commonly an English limited partnership, a form of partnership governed by the Limited Partnerships Act 1907 (LP Act 1907). Under the LP Act 1907, English limited partnerships must have at least one general partner, who is responsible for the management of the limited partnership, and one or more limited partners.

In recognition of the importance of the private closed-ended funds business to the UK finance sector, the government introduced important reforms to the UK limited partnership law applicable to private funds, which took effect in 2017. The reforms introduced the concept of a "private fund limited partnership" (PFLP); an English limited partnership with certain modifications, so as to simplify the regime, making it a more attractive and competitive choice of vehicle. Most private equity and venture capital funds (and related vehicles, for example co-investment vehicles, and feeder funds) will fulfil the relevant PFLP conditions and can therefore choose to be designated as a PFLP (although it is not mandatory to do so).

It is also possible for a private closed-ended fund in the UK to be structured as a unit trust. The English law concept of a trust has no equivalent in some other jurisdictions. It is a structure under which title to the fund's assets are held by a person with legal personality (the trustee) for the benefit of the fund's investors (the beneficiaries). The document constituting the trust (the trust deed) governs the relationship between the trustee and the beneficiaries and, in addition, strict fiduciary duties are owed by the trustee as a matter of law. A trust does not have a separate legal personality; all legal relationships are entered into by or on behalf of the trustee. These vehicles have historically been used for certain real estate fund structures.

It would also be common for a UK-based private fund manager to establish its private closed-ended fund as an offshore vehicle (whether a partnership, a unit trust or a corporate entity). However, for the purposes of the description of closed-ended private funds in this chapter, the focus will be on English limited partnerships.

Listed closed-ended Funds

ITCs and REITs are typically structured as public limited companies under UK companies' legislation and listed on a recognised stock exchange, most commonly the Premium Segment or the Specialist Funds Segment of the Main Market of the London Stock Exchange. As public limited companies, ITCs and REITs will have a board of directors who are responsible for managing its affairs. The board of directors will typically delegate the day-to-day operation of the investment trust. For example, investment management functions are usually delegated to a fund management company, a depositary/custodian will be appointed to be responsible for the safekeeping of the company's assets, a registrar will be responsible for the share register and a broker will advise on the listing of the company's shares. The fund manager, depositary/custodian and broker will usually be authorised and regulated by the FCA.

Open-ended Funds

For an open-ended structure, an OEIC can be used. This is a collective investment scheme structured as a corporate vehicle. Different authorisations apply, depending upon the investments to be made by the OEIC. For example, OEICs which invest in real estate may, provided the relevant conditions are met, be structured as PAIFs. For an open-ended structure, an AUT can also be used. This is a type of unit trust authorised by the FCA, which is constituted by a trust deed made between the trustee and the manager of the fund. The property of the AUT is legally held by the trustee but is managed by the manager. The investors have beneficial ownership of the property of the fund.

In 2013, two new types of tax transparent fund, ACSs, were introduced in the UK. These new types of authorised funds can take the form of a partnership or a co-ownership scheme. In practice, the co-ownership scheme has proved more popular as it is more straightforward to administer. ACSs are only suitable for use by institutional investors. Investment is restricted to either investments of a minimum of GBP1 million or to professional institutional investors. Retail investors could, however, access ACSs through a feeder fund.

Hedge Funds, EuVECAs and ELTIFs

A classic hedge fund structure in the UK would not include the actual hedge fund being domiciled in the UK. This is often because, to set up the fund onshore would lead to tax inefficiencies because the fund would be treated as "trading" rather than "investing" for UK tax purposes. Instead, hedge fund structures will invariably include an offshore company or offshore limited partnership, established in a jurisdiction such as the Cayman Islands. A UK entity would then be appointed as the discretionary investment manager to, or investment adviser of, the hedge fund. For this reason, hedge funds are therefore not discussed in detail in this chapter.

The EU has also enacted the European Venture Capital Funds (EuVECAs) Regulation for certain sub-threshold, venture capital-focused managers, and the European long-term investment funds (ELTIFs) Regulation for funds investing in long-term investments, both of which are directly applicable in the UK. However, to date, there has been little uptake of EuVECAs or ELTIFs in the UK. Again, for this reason, neither EuVECAs nor ELTIFs are therefore discussed in detail in this chapter.

Travers Smith LLP

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+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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