Investment Limited Partnership - 8 Key Financial Reporting Considerations
An examination of some of the key financial reporting considerations for ILPs including financial reporting frameworks available, topical accounting matters and regulatory requirements.
A limited partnership or “LP” has always been a popular vehicle for managers with private equity, private credit, real assets and alternative strategies. The recent change to the 1994 Irish Limited Partnership Act has enhanced Ireland’s previous offering. This important step ensures that Ireland now compares favourably to other jurisdictions.
Regulation is a key factor differentiating for the Irish Investment Limited Partnership (“ILP”) compared to LPs established in other jurisdictions. An ILP is regulated by the Central Bank of Ireland as an alternative investment fund (“AIF”).
Outlined below are some of the key financial reporting considerations for managers looking to establish an ILP.
1. Financial reporting frameworks available
- The financial statements of an ILP can be prepared in accordance with the accounting standards of the home Member State of the AIF or the accounting standards of the country where the AIF is established. The following are the financial reporting frameworks that are potentially available for an ILP - EU IFRS, FRS 102, and alternative GAAPs such as US, Canada and Japan.
- When a Manager is making an election with respect to the accounting standards for the ILP, the factors that could be considered are (i) the main jurisdiction of the potential investors, (ii) where the ILP will be marketed, (iii) if the ILP will be listed and (iv) if the ILP will form part of a previously established structure. If yes – consideration needs to be given to the standards that are applicable to the overall group.
2. Umbrella Structure
- An ILP may be established as an umbrella fund with multiple sub-funds, the assets and liabilities of which will be legally ringfenced. This is a cost-efficient solution for managers instead of creating numerous standalone entities.
- oIt is also worth noting that separate Investment Managers can be appointed to each sub-fund of an ILP if it is structured as an umbrella. The Irish Funds Industry is extremely familiar with regulated umbrella fund structures with multiple sub-funds.
- The presentation of the financial statements of an ILP with multiple sub-funds will be like those of an Irish Collective Asset-management Vehicle (“ICAV”) or Public Limited Company (“Plc”) with multiple sub-funds. Irish administrators have experience preparing these types of financial statements.
3. Valuation of Investments
- The financial statements of an ILP should disclose details of the valuation methodology employed by the AIFM for each asset class held by the ILP during the financial year. These disclosures should align to the AIFM’s valuation policy.
- The disclosures should be specific to the ILP’s investments - boiler-plate language should be avoided in the financial statements. The notes to the financial statements, should provide users with details surrounding the (i)valuation process, (ii)valuation techniques, (iii) unobservable inputs and (iv) range of inputs applied to value the investments.
- It is envisaged that many ILPs will have significant ownership stakes in the underlying private equity investments that they hold. Several financial reporting frameworks have an exemption available regarding the need to consolidate. This is on the basis that certain criteria are met by the ILP.
- It is recommended that the Manager engages in early discusses with its Administrator and auditor on this topic especially in year 1.
5. Capital Accounting
- ILP’s will employ capital accounting. It is therefore expected that ILP’s will engage in distribution waterfalls, in order to allocate investment returns to the limited and general partners. These calculations can become quite complex if there are several drawdowns and closings over the life of the ILP.
- It is important that the financial statements provide details as to (i) how the profits and losses of the partnership are allocated to the limited partners and general partner and (ii) how the carried interest is calculated.
6. Related party transactions
- There is very clear guidance in the accounting standards surrounding the disclosure of related party transactions in financial statements. The following are examples of related party transactions which would require disclosure in the ILP’s financial statements if applicable:
- (i) certain members of the General Partner serve on the board of directors of certain investment in which the ILP holds investment positions;
- (ii) the ILP co-invests with other Funds with the same General Partner;
- (iii) certain expenses of the ILP may initially be invoiced to the Investment Manager. Subsequently, these expenses are charged to the ILP in accordance with the Limited Partnership Agreement; and
- (iv) Details of the specific fee arrangements that are in place with the manager. For example, management fees and incentive fees as per the Limited Partnership Agreement in place.
- It is expected that the ILP will be a very attractive structure for Managers looking to invest in sustainable asset classes. This is due to an AIF being a popular regulated product for Managers as there are few investment restrictions in place. It is worth noting that Sustainable Finance Disclosure Regulation will impose mandatory ESG disclosure obligations for asset managers. Level 2 disclosure includes the ‘principal adverse sustainability impacts statement’ which will apply from 1 January 2022
- There is a straightforward statutory process in place for Managers that decide to migrate their existing partnerships to an ILPI. The Irish Funds Industry is familiar with this migration process. It is the same as the migration process in place for ICAVs.
- A very important point to note is that the performance track record of the Limited Partnership will not be lost on migration. This is a key point for Managers to note when they are preparing their Investment Manager’s Report for inclusion in the audited financial statements.
Jennifer Fitzpatrick, Director, Financial Services Audit, KPMG Ireland