Tisch Lindsay: Limited Partnerships Bill — Second Reading 
Tisch Lindsay: Limited Partnerships Bill — Second Reading 
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LINDSAY TISCH (National—Piako) 
: 
 As previous speakers on the National team have said we will be supporting the Limited Partnerships Bill. It is important legislation. Although the bill is of a technical nature it has certainly been interesting to sit on the Commerce Committee and hear the submissions that came through. They were very informative submissions and out of that we made a number of changes. Many amendments were made during the select committee process and that is significant in getting legislation that we believe is important for New Zealand. 
If we were to just look and recap on what the Limited Partnerships Bill does it introduces a new limited partnership vehicle which is intended to encourage investment in New Zealand. There are three real key features to the bill. The first feature is that liability for limited partners will be limited to the amount of their contribution to the partnership which is certainly an important piece in the bill. It protects the partners so that their liability is not open-ended. The second major feature is that the bill establishes safe harbours that allow limited partnerships to participate in the management of the investment partnership without tainting their limited liability status. The third important feature is that the bill makes limited partnerships a separate legal entity. As opposed to being just a trading entity or a business entity they will actually be a legal entity. Significant tax changes are also included in this legislation and I will mention a couple of them very shortly. 
The primary vehicle for venture capital in New Zealand is the New Zealand Venture Investment Fund. I think it is appropriate first to make just a few comments and talk about how important this is to the New Zealand economy. I quote from a Harvard professor by the name of Josh Lerner an expert in venture capital at the Harvard Business School. He suggests that market failures have resulted in Government support being a factor in the initial development of all future venture capital markets. 
Josh Lerner identifies three potential market failures: first a heightened risk of research and development spillover to competitors when small innovative firms have scarce resources to defend their intellectual property; second the increasing returns nature of a developing venture capital market whereby the development of specialised venture capital skills and a soft infrastructure involving lawyers accountants and business advisers with a deep understanding of venture capital processes means that the 100th investment is considerably easier than the first investment made; and third severe information gaps between venture capital firms and potential investors leads to the requirement that the size of the investment must be significantly large to justify the considerable due diligence costs involved in making the investment. 
If we apply that to young venture capital funds we find that they have yet to develop a track record of success and therefore they have difficulty in securing funds from institutional investors. Josh Lerner states: “In this context the Government’s initiative in 2002 of establishing the New Zealand Venture Investment Fund on an arm’s length basis from political interference and as a co-investor with private sector investors should be recognised as having been a catalyst for the developing of a professional venture capital industry in New Zealand.” 
So we have the New Zealand Venture Investment Fund which is responsible for managing two early-stage investment programmes on behalf of the New Zealand Government. These two investment programmes are first the VIF Venture Capital Programme of $160 million established as a funder of funds. Second there is the Seed Co-investment Fund programme which is a $40 million co-investment programme. 
The team from the New Zealand Venture Investment Fund came to the select committee and made these points and I think they are significant because hopefully this bill will address some of the issues they identified. They said that the New Zealand venture capital market is small and undeveloped by international comparisons. The reported total investment value for New Zealand private equity in venture capital investment in 2004 was $158 million which represents only 0.11 percent of GDP. So in this measure New Zealand is lagging well behind other OECD countries. In fact the size of the New Zealand venture capital sector would need to increase by at least fivefold to approach the levels comparable with Ireland the United Kingdom and Singapore. 
In 2004 the fund surveyed 15 offshore funds that might invest their venture capital into private equity funds globally and into New Zealand. Twelve of those 15 responded representing in excess of $50 billion of private equity and venture capital funds under management. All but one of those parties said they would consider investing private equity and venture capital funds in New Zealand. However the prerequisites for investing were the presence of a world-class investment structure in the form of a limited partnership and flow-through taxation treatment. This is what this bill actually provides for. This bill addresses those concerns that have been identified as a major challenge by the Venture Investment Fund. 
I move now to another point that has been made by many submitters and it has also been mentioned in the debate this evening—that is the safe harbour provisions. The original legislation made provisions for safe harbours to be in regulations but they will now be part of the bill. I will quote from one of the submissions about what the safe harbours do: “The bill provides the power to set out in regulations safe harbours or activities that do not constitute taking part in the management of the business of a limited partnership. This is important because limited partners are not permitted to take part in the management of the limited partnership. If they do they may be jointly and severally liable with the limited partnership and general partners in the same way as a general partner would be.” This bill actually protects them from that and that is a significant change. 
The Ministry of Economic Development came out with a discussion document on safe harbours for limited partnerships. It is interesting that it has made about 15 recommendations that would add value to the safe harbour position. 
I will make just a final point concerning clause 116 in the original bill which related to the tax treatment where a partner’s right to a partnership income is different from his or her share in the partnership assets. That was one of the major concerns that submitters picked up on because there needed to be some clarity as to what it actually meant. This concern was raised by members of the committee as well and it is very clear now that this has been sorted out. To give an example in a farming situation in some farming operations it is possible for a partner’s proportional entitlement to income from the partnership to be different from his or her share in the partnership assets. For example a father and son might each own 50 percent of the farm’s land and buildings but for family reasons one partner has rights to 90 percent of the income from the farm. 
This situation can also occur in professional services firms such as accounting and law firms where it is common for each partner’s rights to the profit from the partnership to fluctuate from year to year based on individual performances but each partner’s share of the partnership assets remains the same. For example 10 partners in a firm each have a share of 10 percent in the assets of the firm. However the partnership agreement may provide that their right to income from the partnership is partly dependent on their performance during the year. Therefore a partner who performs particularly well may be allocated 15 percent of the partnership profits from that year and a partner who performs poorly may be allocated 5 percent of the profits. Although one partner may have 10 percent of the assets overall in this case in terms of the income distribution it could be treated on that partner’s performance. The bill clears up that issue which was a major concern raised by a number of submitters. 
That is important because if we are to proceed with this legislation—and National supports this bill—then these technical aspects of the bill are the sorts of things that need to be sorted out and need to be very clear if we are to get investment. National will support this bill and we look forward to its Committee stage. 
Bill read a second time.