Fund Structure & Administration

Purpose and legal structure

Each Microfund is expected to be established as an English private fund Limited Partnership. Its purpose will be to make, hold, monitor and realise investments in accordance with the investment strategy, policy and restrictions agreed with British Business Finance Ltd (BBFL). The strategy must be commercially viable and capable of attracting private investment.

The Limited Partnership Agreement (LPA) assumes a general partner and limited partners, with a separate carried interest partner. It also assumes that the Partnership will qualify as an alternative investment fund and will be managed by an appropriately authorised alternative investment fund manager (AIFM).

The prospective fund manager may hold the relevant regulatory permissions directly or, where appropriate, operate under a regulatory umbrella as an appointed representative of an authorised principal firm. A separate investment adviser may provide non-discretionary investment advice, while the authorised AIFM remains responsible for the regulated portfolio and risk-management functions. The final regulatory arrangements will depend on the proposed structure and the permissions held by each party.

The Partnership’s principal office and the general partner’s, investment adviser’s and Partnership’s principal place of business must remain in the UK unless BBFL gives prior written consent to a change.

Regulatory arrangements

Each Microfund must have an appropriate regulatory and operational structure. The Partnership’s portfolio must be managed on a discretionary basis by a person holding the authorisations required for the activities it performs.

The prospective fund manager may hold the relevant regulatory permissions directly or, where appropriate, operate under a regulatory umbrella as an appointed representative of an authorised principal firm. A separate investment adviser may provide non-discretionary investment advice, while an appropriately authorised alternative investment fund manager (AIFM) remains responsible for the regulated portfolio and risk-management functions.

The responsibilities of the general partner, AIFM, investment adviser, principal firm, administrator and other service providers will be set out in the Partnership’s legal and service-provider documents.

Fund life and investment period

Each Microfund will have a fixed term beginning on first close and will not be an evergreen vehicle. We would typically expect a fund term of around ten years, with an investment period of approximately three to five years. The remaining period would generally be used to support and realise the fund’s investments

The precise fund term and investment period will be agreed for each fund and recorded in its LPA, taking account of its investment strategy and portfolio construction. The LPA may also allow the life of the Partnership to be extended for up to two additional periods of one year each, to support an orderly wind-up and distribution of the fund’s assets.

The investment period will end on the date specified in the final LPA, or earlier in certain circumstances. After the investment period, new drawdowns for investments are generally restricted to investments to which the fund is already contractually committed and permitted follow-on investments, subject to the agreed cap.

General Partner

The general partner has responsibility for the management, operation and administration of the Partnership. Limited partners do not take part in day-to-day management, which helps preserve their limited liability, but retain the information, consent and other rights set out in the LPA.

Investor consents and Advisory Committee

Certain matters require investor approval. The LPA distinguishes between Investor Ordinary Consent, generally more than 50% of relevant commitments, and Investor Special Consent, generally at least 75% of relevant commitments. The LPA will identify the matters requiring each level of consent.

An Advisory Committee will be established with nominees from selected investors, including a representative nominated by BBFL. Its role includes reviewing actual or potential conflicts of interest, investment valuations and Partnership expenses; considering matters referred to it under the LPA; and reviewing the fund’s progress against its investment objectives. Advisory Committee members do not manage the fund.

Taxation

An English Limited Partnership is generally expected to be treated as tax transparent for UK tax purposes. The tax treatment of each partner will depend on its own circumstances, and prospective investors and fund managers should obtain their own tax advice.

Rights of BBFL as a Limited Partner

BBFL will participate in the fund as a Limited partner and will have the information, consent and other investor rights set out in the LPA and related documents.

Certain significant matters will require Investor Ordinary Consent or Investor Special Consent. These may include amendments to the LPA, specified changes to key executives or service-provider arrangements, the lifting of an investment suspension, and the termination or extension of the fund.

The LPA also includes protections where there has been a breach or other specified fault event involving the general partner, investment adviser or a key executive. In those circumstances, the fund’s investment powers may be suspended and investors may exercise the termination and replacement rights set out in the LPA.

Any proposed replacement of a key executive will be subject to the approval requirements in the final LPA and must be capable of fulfilling the relevant responsibilities and time commitment.

Commitments, drawdowns and defaults

Each investor will make a commitment in the amount agreed in its application documentation. Undrawn commitments may be called by the general partner for any purpose of the Partnership. Drawdown notices will normally give at least ten business days’ written notice and, subject to confidentiality obligations, will provide reasonable details of the anticipated use of funds.

Commitments are expected to be drawn in sterling unless otherwise agreed. No interest is payable by the Partnership on commitments or capital contributions. Certain amounts returned to investors may be available for redrawing, including specified amounts returned shortly after an investment and amounts originally drawn for agreed Partnership expenses or the general partner’s profit share.

Fund managers will be expected to put appropriate arrangements in place to support the availability of committed private capital when drawdown notices are issued. Where private commitments are raised from individual investors, BBFL may require appropriate evidence that the capital can be made available when needed.

If an investor fails to meet a drawdown notice, the general partner will require the default to be remedied and interest to be paid. If the default continues, the remedies may include a forced sale or compulsory redemption of the investor’s interest, loss of rights to future income or gains, exclusion from future investments, and suspension of voting and information rights. The precise remedies and rates will be set out in the final LPA.

Pending its use for investments, Partnership liabilities, the general partner’s profit share or distributions, Partnership cash must be held in accordance with the cash-management requirements in the LPA.

No implied endorsement or warranty

Any reference to BBFL, the British Business Bank or Government in publicity or promotional materials must comply with the applicable legal and communications requirements, including any requirement to obtain approval before publication. Participation by BBFL or the British Business Bank must not be described or presented as an endorsement, warranty or guarantee of the Microfund or its performance, and promotional materials must include any disclaimer required under the fund’s legal documents or communications guidance.

General partner’s profit share and carried interest

Fund manager remuneration is expected to combine a general partner’s profit share and performance-related carried interest. The rate and profile of the general partner’s profit share, the preferred return and the carried interest terms will be agreed for each fund and recorded in the final LPA.

The general partner’s profit share is allocated as a first charge on profits otherwise attributable to third-party investors.  

Partnership expenses

The Partnership may bear properly incurred organisation expenses up to an agreed cap and reasonable ongoing expenses relating to the business and operation of the Partnership. These may include reporting and audit costs, professional adviser costs, investment transaction and abort costs, taxes, regulatory costs, insurance, litigation costs, Advisory Committee costs and wind-up costs.

Day-to-day overheads of the general partner, investment adviser and their associates, including staff remuneration, compliance and office costs, are for their own account. Administration charges and fees associated with the alternative investment fund manager will be payable by the Partnership, subject to the terms and any applicable expense limits set out in the LPA. The LPA may cap ongoing expenses for each accounting period, with any excess borne by the general partner.

Fees from investee companies

Executives may charge and receive specified fees from investee companies, including transaction, monitoring, directors’, advisory or consultancy fees. Any such fees will be subject to the fee-offset arrangements in the LPA. The general partner’s profit share will be reduced in accordance with the fee-offset arrangements in the LPA, after taking account of permitted unreimbursed costs and expenses.

Investment, co-investment and conflicts

The general partner must manage the fund in line with the agreed investment policy, objectives and restrictions of the fund. These will include limits on exposure to any single investee company, restrictions on certain investment types and a requirement concerning the amount invested in UK-based or UK-operating companies. The fund will have the first and exclusive opportunity to participate in investment opportunities received by the general partner or key executives that meet its investment objectives and are within its mandate. Rules also apply to the launch of a successor fund and the allocation of investments between overlapping funds.

The general partner may offer co-investment opportunities where this is in the fund’s best interests and the fund has first been offered the opportunity to invest up to its permitted limit. Co-investment terms must not be materially more favourable than the fund’s terms, subject to legal, tax or regulatory considerations, and co-investors bear their proportionate costs.

The general partner must maintain a conflicts of interest policy. Certain conflicts and related-party interests require review or approval by the Advisory Committee. Investors represented on the Advisory Committee must declare relevant conflicts and abstain from voting on the affected matter.

Distributions and carried interest

After providing for Partnership liabilities, distributable assets are allocated among investors by reference to their respective distribution shares. For each third-party investor, the LPA applies the following waterfall:

• first, to the general partner for any outstanding general partner’s profit share attributable to that investor;
• second, to the investor in repayment of its drawn commitment that remains outstanding;
• third, to the investor until it has received the agreed preferred return;
• fourth, a carried interest catch-up to the carried interest partner; and
• finally, the residual amount between the investor and the carried interest partner in the proportions agreed for the fund.

The fund will not generally recycle proceeds from realised investments into new investments, except for the limited redrawing and retention arrangements expressly permitted by the LPA.

Transfers

An investor may not transfer all or part of its interest without the general partner’s prior written consent. The general partner may refuse a transfer where it may create legal, regulatory or tax issues or otherwise breach the LPA. Consent to a transfer to an approved transferee will not be unreasonably withheld where the required conditions are satisfied. The transferring investor bears the costs of an approved transfer.

Key executives and suspension

The final LPA will record the agreed time commitment of each key executive. If a key executive does not meet that commitment or becomes unable to do so, the general partner must notify investors and the Partnership’s ability to make new investments and disposals will be suspended, subject to the exceptions and investor approval mechanisms in the LPA. If the position is not resolved within the specified period, the investment period and, in certain circumstances, the Partnership may terminate.

Termination and giveback

The Partnership may terminate on the events set out in the LPA, including expiry of its term, the realisation of its final investment after the investment period, specified legal or regulatory events, termination of key service arrangements without replacement, or a fault or no-fault termination.

Fault termination protections cover specified breaches, fraud, wilful misconduct, gross negligence, certain criminal or regulatory events, unauthorised changes of control and relocation or redomiciliation outside the UK without BBFL’s prior written consent.  The LPA will also include no-fault termination provisions. The applicable investor approval threshold and the General Partner’s Profit Share payable following a no-fault termination will be selected from the options set out in the LPA and confirmed for each fund.

To meet certain Partnership liabilities, investors and the carried interest partner may be required to return a proportion of distributions made during the period specified in the LPA. The LPA caps an investor’s giveback at the lower of 25% of its commitment and 50% of all distributions received, subject to the detailed terms and claims provisions in the LPA.

Reporting, valuation and tax

The general partner will prepare annual accounts for the Partnership and arrange for them to be audited. The LPA requires audited accounts to be provided to partners within 90 days after the end of each accounting period.

The general partner will also provide quarterly unaudited reports within 60 days after each quarter end. These reports cover the Partnership’s investments and other assets, purchases and disposals, cost and valuation information, unaudited financial statements, co-investments and specified related services or transactions.

Investments will be reported at fair value in accordance with the accounting and valuation requirements set out in the LPA. Investors must provide tax information reasonably requested by the general partner, including information needed to comply with FATCA, the Common Reporting Standard and other applicable tax reporting regimes. Failure to provide required information may result in withholding, cost recovery or withdrawal measures.

In addition to the financial and investor reporting required under the LPA, funds will be required to provide business information and portfolio data in the format specified by BBFL. The information required may include details of portfolio investments, acquisitions and realisations, valuations, material portfolio developments and investment opportunities considered during the reporting period. The detailed requirements and reporting templates will be provided separately.

Information provided by a fund will be handled in accordance with applicable legal and contractual confidentiality provisions. BBFL may use and publish aggregated programme-level information relating to the performance of Investor Pathways Capital. It may also disclose information where required by law or where necessary to support an independent evaluation of the programme. Any disclosure of fund-specific or business-specific information will be subject to applicable legal and confidentiality requirements.

Environmental, social and governance (ESG) reporting

Microfunds will also be required to comply with BBFL’s applicable ESG reporting requirements. The scope, format and frequency of this reporting will be confirmed in the relevant reporting documents.

National Audit Office requests

The National Audit Office scrutinises public spending on behalf of Parliament. Microfunds and their fund managers will be required to cooperate with requests for information from the National Audit Office, in accordance with the fund’s legal and reporting documents.

Side letters and most favoured nation rights

The general partner may enter into a side letter or other agreement with an individual investor that establishes rights under, or alters or supplements, the LPA for that investor.

If a side letter gives an investor terms that are more favourable than the terms in the LPA, the benefit of those terms will be offered to all investors that meet any conditions attached to the original offer, including any condition relating to commitment size.

The most favoured nation (MFN) right does not apply to terms that are specific to an investor’s legal, tax or regulatory position, a right to nominate a member of the Advisory Committee, specified information disclosure or confidentiality terms, or specified transfer and related transferee admission terms.

The general partner will disclose the terms of side letters to each investor within 60 business days after final close, or within 60 business days after a later side letter is issued. An eligible investor must elect to receive the benefit of an applicable term within 30 business days after disclosure. All side letters must be disclosed to and approved by BBFL in writing.