Dissolution of Guernsey Limited Partnerships: Are the Limited Partners Sufficiently Protected in the Current Environment? (Part 1/4)

There has been a strong growth of private equity in Europe since the 1980s and in particular in Guernsey since the introduction of the Limited Partnerships (Guernsey) Law, 1995 (the “LP Law”). Guernsey has gone on to see a significant increase in funds domiciled on the island and the financial sector has become a key contributor to Guernsey’s economy and a significant employer.

Considering the 2007/08 financial crisis was some 12-13 years ago, I intend to write a series of end-of-week pieces on the knock-on effects from the financial crisis on 10-year funds that were raised around that time. With increasing liquidity around the time of the crisis and increasing competition for assets, this led to funds acquiring expensive investments which are ultimately difficult to sell or exit. I intend to focus on closed-ended funds which have reached the end of their fixed term, after exhausting any extensions, whilst still holding material investments.

My views arise from a research piece that I did as part of my ongoing LLM in International Financial Law at Sussex University. My hypothesis when I started out was that the global financial crisis has led to a set of circumstances that were most likely not envisaged when the LP Law was drafted. In particular, the fund dissolution provisions in the LP Law are limited in scope, and as an increasing number of funds hit the dissolution phase holding material assets, the dissolution clauses have become more relevant than ever. This then has implications for the balance of power between the General Partner (GP) and the Limited Partners (LPs) during the dissolution process, and the GP’s behaviour after the end of the Fund’s PPS (remuneration) regime. To ground my analysis within a practical environment, future instalments will draw from the renewable energy sector and private equity investment in this asset class, which is a sector that I have been immersed in for a number of years.

To kick off this first piece, let me introduce the bare bones of closed-ended, or perhaps fixed-term, funds that I am considering. A limited partnership is managed by one or more GPs under a limited partnership agreement (LPA) and LPs sign subscription agreements committing funds to the partnership. Closed-ended funds are a ‘collective investment scheme under which the investors are not entitled under the terms of the scheme to have their units redeemed’.[1] The LP Law clearly defines the legal relationship between the GP and the LPs whereby the GP is wholly ‘liable for all debts of the partnership’ and is responsible for representing and binding the partnership; in contrast, each LP is only liable for the capital it commits to the partnership and it ‘shall not participate in the conduct or management of the business of the limited partnership’.[2] Whilst the licensed GP remains the ultimate entity for controlling the fund, it is likely that the partnership permits some sort of advisory committee made up of key LPs where the GP can hear the views of LPs without them participating in the management of the fund. Nonetheless, in simple terms, the GP and its role within a fund can be considered similar to that of minority owner-directors managing and controlling a company and its operations.

Let me leave it there for now, but also I will leave this taster for the next instalment. According to Palico, an online marketplace for PE funds and who analysed 200 funds that were dissolved in 2014 (see graph below), ‘the lifespan of the median private fund - across all sectors and geographies - has reached an unprecedented 13.2 years, up from 11.5 years in 2008’.[3] There is clearly an increasing trend towards longer outturn fund lives, although I don’t know how the fund life was measured in each case. But the data is fascinating, especially for any prospective LPs considering signing up for what is marketed as a 10-year fund (I appreciate that the data is old but it was the best I could find in the public domain. For those of you who subscribe to PE data analytics firms, then you can probably see the latest on PE fund lives).

[1] The Protection Of Investors (Bailiwick of Guernsey) Law 1987 art 44

[2] The Limited Partnerships (Guernsey) Law 1995, art 2, 12

[3] Palico,’ PE Data Snapshot – Median PE Fund Life Hits Record 13.2 Years’ <https://blog.palico.com/2015/03/pe-data-snapshot-median-pe-fund-life-hits-record-13-2-years> accessed 14 January 2020