Styperson POPE

Strategy & Compliance for Investment Firms

Structuring Funds: Unregulated Collective Investment Schemes

This isn’t intended to be comprehensive but it hopefully introduces some of the terminology for those who are unfamiliar.  Most fund vehicle types link to Wikipedia articles which open in a new window.

Partnerships
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) are popular UK structures for funds because they are ‘tax transparent’, meaning that they will pay no tax themselves and each of the investors (partners) will be responsible for their own tax. This is particularly attractive to investors who don’t pay UK tax – this applies to SIPP and SSAS pension trusts and investors based outside the UK.

Limited Partners / General Partners / Designated Members
There is likely to be a mix of passive and active members. Investors will be passive (Limited Partners) but the people running the fund will be active (a General Partner in an LP, or at least two Designated Members in an LLP). These active partners may also be called the ‘Sponsor’ and will be responsible for the running of the fund which may include calling investor meetings, paying the partnerships’ bills, making investment decisions, or agreeing contracts to outsource these and other duties. Typically, this role is played by an existing company or a special purpose vehicle (SPV) run by whoever initiates the fund – the people with the bright idea!  They may also have a carried interest vehicle which provides them with a tax-effective way to benefit from the success of the fund.

If all of the investors are in day-to-day control of their property (their investment) then the fund may be a ‘syndicate’ (and not really a fund at all) but these are extremely difficult to design and manage for more than a small handful of investors. If any investor is not in day-to-day control of their property it is likely that the fund will constitute a Collective Investment Scheme under UK law. As this is the case for the vast majority of funds, lets assume it’s the case here…

Operator
Any person setting up or operating a fund run from the UK (even where the partnership is established off shore but actually managed by people based in the UK), must be authorised by the FSA to establish, operate and wind up a collective investment scheme. If the people behind the fund are not already an authorised person with the appropriate permissions, then it’s likely that they will require the services of an ‘operator’. The operator will ensure compliance with regulatory requirements, will ensure appropriate information is provided to investors, and can play an important role in aiding the promotion the fund (there’s more detail on this last point, in our article “Three Routes To Promote a Collective Investment Scheme”).

Companies
Some people thinking about establishing a fund, consider structuring it as a limited company in order to avoid the need for an operator (incorporated bodies are excluded from the definition of a collective investment scheme unless they qualify as Open Ended Investment Companies – OEICs) but this is unlikely to be attractive if the fund is larger than about £1m because the cost of an operator will work out less than the amount of corporation tax that the fund would pay. The FSA also places restrictions on the way in which a company’s shares can be sold to investors which, although different, are no less onerous than those on collective investment scheme units and would usually require the assistance of professionals adding further costs.

Feeder Funds & EPUTS
There are a variety of reasons why feeder funds may be used but the most common are to provide:

  • a UK entity through which UK investors can put money into offshore funds;
  • an offshore entity through which non-UK investors can invest in UK funds; or
  • an EPUT through which UK capital gains tax exempt investors can invest.

The reasons for establishing such a fund are usually driven by tax advantages such as ensuring that the upside of investments is taxed as a capital gain rather than income or ensuring that capital gains tax exempt investors, such as SIPP and SSAS pension schemes, do not pay tax at all. ‘EPUT’ stands for Exempt Property Unit Trust and, like other feeder funds, will usually be one of the Limited Partners in the underlying fund. If run from the UK, it is likely that the feeder fund will also be a Collective Investment Scheme and will therefore require an authorised operator.

Unregulated vs. Authorised
This is where the terminology begins to get confusing. All Collective Investment Schemes run from the UK, require the involvement of an authorised operator or manager however, within this, there are two types of scheme; unregulated and authorised. These terms refer to the scheme itself (not the operator). ‘Unregulated’ can also be misleading because they are heavily regulated and very restricted in how they can be promoted.

Authorised funds must apply to the FSA for their authorisation and this can be very costly (for most funds, it is prohibitively so) and can take up to six months from application to authorisation. In addition, authorised funds need to follow rules allowing investors to leave the fund which can make it difficult for such schemes to invest in illiquid ‘alternative assets’ like property, art, wine, films, and shares in unquoted companies. For these reasons, most funds are structured as unregulated collective investment schemes.

StypersonPOPE specialises in assisting anyone involved in establishing or running unregulated collective investment schemes whether as General Partner, Sponsor, or Operator. If you would like to know more about our services, please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.

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