Limited Partnership – Collective Investment Mechanism in the Astana International Financial Centre
Limited Partnership – Collective Investment Mechanism in the Astana International Financial Centre
Erbol Nazhmidenov
Legal Adviser, AIFC Legal Services Board
Lawyer and Partner Law Council Group
In today's world, attracting investments plays a key role in the successful development of a business. One of the popular mechanisms used by both entrepreneurs and investors is the structure of a Limited Partnership (LP). This format allows for effective risk management and the distribution of responsibility among participants while maintaining flexibility in decision-making. In this article, we will take a closer look at how a Limited Partnership functions, its advantages and features, and how this model can become a reliable tool for successfully attracting capital and long-term investments.
A Limited Partnership is a business structure created by more than one business owner. An LP consists of at least one "general" partner and at least one "limited" partner, although there can be more than one of each. General partners are those who make business decisions and manage day-to-day operations. They also bear unlimited personal liability for the company's legal and financial debts. Limited partners are those who invest money or property in the LP but do not control the business and are not personally liable for the company's debts.
The Collective Investment Mechanism in a Limited Partnership
- Capital Aggregation:
An LP serves as a mechanism for pooling capital from multiple investors, known as limited partners. These investors contribute varying amounts to the partnership, creating a significant capital pool that the general partner can direct toward a diversified investment portfolio. This pooling of funds is especially relevant in private equity, where large investments often require substantial financial resources. In the Astana International Financial Centre (AIFC), collective investment mechanisms are realized through the function of Managing a Collective Investment Scheme.
- Access to Larger Deals:
The collective strength of pooled capital allows the LP to participate in larger and more profitable deals. Private investment funds can use the collected funds to acquire significant stakes in companies, add value, and eventually sell these stakes for a profit. Without pooling capital, individual investors would find it difficult to access such high-yield opportunities.
- Risk Diversification:
Collective investments through an LP enable risk diversification across a broad range of assets. By investing in a portfolio of companies rather than a single enterprise, the partnership reduces the risk associated with any one investment. Such diversification is a key advantage for limited partners, as it provides more stable and balanced returns.
- Leverage:
With a larger capital pool, LPs in private equity can use their resources to secure better financing terms from banks and other lenders. The economies of scale achieved through pooling capital also reduce transaction costs, enhancing the overall profitability of the partnership.
- Collective Investment Expertise:
In an LP, the general partner managing the pooled capital typically possesses significant expertise in investment strategy, market analysis, and value creation. This expertise is crucial for identifying, acquiring, and managing portfolio companies. By pooling their resources, limited partners benefit from the knowledge and experience of the general partner, which they might not have access to individually.
An example of standard investment structure in an LP:
General Partner is responsible for managing the partnership. Although they usually contribute a nominal amount of capital, GPs bear unlimited liability and, as such, remain responsible for all the debts and obligations of the LP.
Limited Partners are essentially investors in the fund and contribute capital for pooling and investment purposes. A limited partner can review the books of accounts and consult with other partners regarding the business's condition and prospects.
A Special Purpose Company (SPC) is an entity established to carry out specific projects or objectives, often acting as a borrower in transactions. Such companies are usually created by the project initiators. The main goals of creating an SPC include capital protection and risk distribution. Funds use SPCs to manage risks, optimize taxes, attract investments, maintain financial transparency, provide structural flexibility, and ensure confidentiality. This allows for efficient investment management and risk minimization.
According to the Special Purpose Company Rules (AIFC Rules No. GR0001 from 2017), an SPC can carry out the following activities:
- • acquisition, ownership, and disposal of any assets (tangible or intangible, including, for example, receivables and shares) in connection with and for the purposes of a transaction;
- • obtaining any type of financing, providing any type of security over its assets, providing any guarantees or similar support in favor of its shareholders or any of its subsidiaries, or entering into any agreements to hedge (or minimize) risks in connection with and for the purposes of a transaction;
- • financing the initiator or another special purpose company;
- • acting as a trustee or agent for any participant in a transaction.
Exit Mechanisms from an LP:
Sale of the partnership interest:
One way to exit is by selling the partnership interest to a third party. This can be done through a private sale or a public offering. Limited partners can sell their full interest or a portion of it to a new investor. The sale price will be determined by market conditions and the valuation of the partnership’s assets.
Buyout of the partnership interest:
Another option is to request a buyout of the partnership interest by the partnership itself. The partnership may agree to buy out the limited partner’s interest, but this requires sufficient liquidity for the buyout.
Initial Public Offering (IPO):
In some cases, the partnership may go public through an IPO. In this scenario, the limited partner can sell their shares on the stock exchange and exit the partnership. However, not all partnerships are structured for an IPO, so this may not be available for some.
Mergers and Acquisitions (M&A):
The partnership may be acquired by another company or merged with another partnership. In this case, limited partners may receive cash, shares, or a combination of both for their interest.
Liquidation of the partnership:
The partnership may also be liquidated, with its assets sold, and the proceeds distributed among the partners. In this case, the limited partner would receive a portion of the proceeds proportional to their share in the partnership.
Advantages of Collective Investments for Limited Partners Партнеров
- Lowering entry barriers::
Collective investments within an LP lower the entry barrier for individual investors, allowing them to participate in private equity deals that would otherwise be inaccessible. Limited partners can invest smaller amounts while still gaining access to high-yield opportunities and benefiting from professional management.
- Risk reduction through collective investment::
The collective nature of the investment pool means that individual investors are less exposed to potential failures of any single investment. Risk is spread across the portfolio, which is carefully selected and managed by the general partner to maximize returns while controlling risks.
- Strengthened bargaining power::
The large capital base gives the LP significant bargaining power when purchasing companies or negotiating terms with creditors and other stakeholders. This strong position can lead to more favorable investment terms, reduced acquisition costs, and ultimately higher returns for all partners.
- Potential for higher returns::
By pooling investments, the LP can access a broader range of investment opportunities, including those with higher return potential that may require significant upfront capital. Economies of scale and professional management further increase the likelihood of achieving substantial returns, making the LP an attractive option for investors seeking high-yield opportunities.
- Simplified administration and reporting::
For limited partners, collective investments in an LP simplify the administrative burden. The general partner handles all operational aspects of the investments, including due diligence, deal structuring, and ongoing management. This centralized administration allows limited partners to focus on their financial strategies without becoming involved in the day-to-day management of the portfolio.
Conclusion
Collective investments are the foundation of the Limited Partnership structure in private equity, offering numerous advantages to both general and limited partners. By pooling capital, diversifying risks, and leveraging collective expertise, the LP provides a solid foundation for managing significant investments and achieving high returns. For investors, the LP model opens doors to private equity opportunities that would otherwise be inaccessible, while providing the protection and efficiency that collective investing offers. This combination of scale, expertise, and risk management makes the Limited Partnership a cornerstone of private equity, driving growth and innovation in the industry.
Disclaimer
The information in this note is not legal or professional advice. No part of it should be relied upon, and no part of this note can be used in place of obtaining legal advice. The information in this note is intended for general informational purposes. It should also be noted that the law and its application may have changed since the publication date of this note. If you have any questions, please contact us (WhatsApp: +7 (707) 384 83 52, email: info@lcg.kz).
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