Fundamentals of Private Equity and Venture Capital - PEI Media

not facilitate a tranched drawdown of committed
capital. The Luxembourg SICAF is a similar
vehicle to the SICAV but with fixed rather
than variable capital; SICAFs may issue partly
paid-in shares (provided a minimum of 25
percent of their par value is paid-up at the
date of issue) but a capital increase or
decrease requires a change of the articles of
incorporation by decision of an extraordinary
general meeting of shareholders.
The limited partnership is commonly viewed as
the vehicle of choice for private equity fund managers
and is the vehicle most often used for private
equity funds with an international investor
base. The other vehicles described above tend to
be used where a more limited range of investors
is targeted and/or where the manager's activity is
concentrated in particular jurisdictions, where a
non-partnership vehicle may be more appropriate.
The features of limited partnerships are considered
in more detail below.
Limited partnerships
A limited partnership comprises a general partner,
who is responsible for the operation and management
of the partnership and has unlimited liability
for the partnership's liabilities that cannot be
satisfied out of its assets, and one or more limited
partners, who cannot be involved in operation or
management and whose liability is limited to the
amount of capital contributed by them to the partnership.
In the private equity fund context, the
fund manager acts as general partner (though
often the general partner is a subsidiary of the
manager rather than the manager itself) and the
investors are the limited partners. The general
partner and/or manager of a limited partnership
will usually need to be regulated in the place
where it is based, which may be different from the
jurisdiction of the fund. For example, the UK manager
of an English limited partnership will need to
be regulated by the UK Financial Services
Authority (FSA), whereas an off-shore manager
operating an English limited partnership fully outside
the UK would not need to be regulated by the
FSA in relation to that activity but would need to
be regulated in the relevant off-shore jurisdiction.
The main advantages of a limited partnership
structure include:
• limited liability for investors (assuming they
do not participate in “management”);
• tax transparency;
• contractual flexibility;
• manager's autonomy (the limited liability of
each limited partner generally depends on it
not becoming involved in management);
• no/minimal regulatory requirements in
respect of the vehicle itself;
• potential for tax efficient management and
performance fee structuring; and
• no requirement for public disclosure of the
partnership agreement or the partnership's
accounts.
Meanwhile, the potential drawbacks of limited
partnerships may include the following:
• certain countries do not regard limited partnership
vehicles as tax transparent, which
may necessitate establishing a separate parallel
vehicle for investors in such jurisdictions;
• it will not be possible for a limited partnership
to take advantage of the EU Parent/Subsidiary
directive (exempting dividends paid by subsidiaries
to their parents from tax), although
subsidiary companies owned by the limited
partnership and individual investors in the
limited partnership may be able to do so; and
• it will only be possible to rely on double tax
treaty protection to the extent that the underlying
investor is able to do so (although subfund
structuring using, for example, Dutch or
Luxembourg corporate holding entities is usually
employed to minimise withholding and
achieve other tax objectives).
Although it is possible to generalise about the
features of limited partnerships as a type of fund
vehicle, there are significant differences
between the different types of partnership established
in different jurisdictions, and it is important
to understand these differences when
designing a structure. The most common jurisdictions
for private equity limited partnerships
are Cayman, Delaware, England, Jersey and
Scotland. Most of the core characteristics are
common to all of these jurisdictions; however
one important distinction is whether the partnership
is deemed to have separate legal personality
(Scottish LP) or is a body corporate
(Delaware LP; Jersey LP by election). Partnerships
with the latter characteristics may not be
recognised as tax transparent by the local tax
authorities in certain jurisdictions where they
invest, which would remove one of the key rea-
20 THE FUNDAMENTALS OF PRIVATE EQUITY
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