Shanks Katrina: Limited Partnerships Bill Taxation (Limited Partnerships) Bill — Third Readings 
Shanks Katrina: Limited Partnerships Bill Taxation (Limited Partnerships) Bill — Third Readings 
[Volume:645;Page:14774] 
KATRINA SHANKS (National) 
: 
 It is my pleasure this afternoon to talk to the Limited Partnerships Bill and the Taxation (Limited Partnerships) Bill. This legislation is a new form of vehicle intended to encourage investment in New Zealand. It has the following key features: limited partners’ liability will be limited to the amount of their contribution to the partnership it establishes safe harbours that allow limited partnerships to participate in the management of the investment partnership without tainting their limited liability status and it makes a limited partnership a separate legal entity. This legislation also introduces new tax rules for limited partnerships and updates the tax rules for general partnerships. The legislation is a vehicle that encourages venture capital in New Zealand. Venture capital plays a critical role in driving individual company growth and innovation and this will bring substantial benefits to New Zealand’s national economic performance over a period of time. 
We have at this moment in New Zealand a capital market that is small and undeveloped by international comparisons. I understand that the reported total investment value for New Zealand’s private equity and venture capital investment in 2004 was only $150 million. This represents 0.11 percent of GDP. If members look at the OECD tables they will see that we lag behind key players at the top of the tables such as—as my colleague Lindsay Tisch pointed out—the United Kingdom the United States Israel Sweden Singapore and many more. Overseas the reality is that investors in private equity and venture capital funds are typically long-term investors such as pension funds and other institutional investors. The standard investment vehicle used by those investors to invest in funds is the limited partnership vehicle. 
The old provisions in Part 2 of the Partnership Act 1908 provided a much more restricted basis for special partnerships but this legislation goes much further and it has been much needed in this area. In this legislation those who seek to invest are commonly referred to as limited partners. They have not only limited liability but also limited control over the management of the funds in the organisation. They invest significant amounts in private equity and venture capital funds for a long-term horizon—typically 10 years or more. The investment activities of the private equity and venture capital funds are undertaken by fund managers who are referred to as the general partners or partner. 
A very significant barrier to the growth of the New Zealand venture capital industry has occurred because of the lack of investment from international and domestic institutional investors. The industry needs to attract these investors in order to develop in both scale and maturity. The lack of an investment vehicle that is easily recognised by institutional investors has been identified as one of the constraints of investment in New Zealand for our growth and our economic development. 
The Commerce Committee has made a large number of changes to the original bill. One of the most interesting changes is that in the Partnership Act 1908 where there was a constraint on banking or insurance activities being undertaken by special partnerships the officials actually sought to maintain the separation. The committee has not accepted that position and I think that in the result the officials yielded on this point because the select committee was satisfied that the generic regulation that applies to banking and insurance sectors today provides sufficient safeguards against the governance risks that may arise when a limited partnership operates as such a business. 
The one point to consider is whether this simply catches up with overseas practice or whether it learns from experience and positions New Zealand more favourably than our close competitors for venture capital. For example I refer to a management buy-out and investment option available to limited partnerships. A limited partnership is required to make a specified portion of investment in New Zealand. Is investment permitted in listed and unlisted companies? Do these issues separate us from other countries so that we will be more attractive to invest in for venture capital? 
As this legislation is implemented I think we will need to consider things and monitor certain issues such as the extent of our “safe harbours” or activities a limited partner can be involved in without contravening the no-management rule. These are to be contained in regulations which need to be developed well in advance of the enactment of this legislation. We need to monitor the trigger point for when someone becomes a limited partner and can avail himself or herself of the protection of limited partner status. 
The draft legislation places the obligation on the general partner to get it right. In relation to the extent of the power in an insolvency to claw back distributions made to limited partners the current test applies if the limited partner knew that the limited partnership would not satisfy the solvency test after the distribution and applies for a 3-year period. Written partnership agreements are compulsory for limited partnerships but there is no test as to the quality of their agreement. There is continued confidentiality of names and investments of limited partners including where that information is contained in annual returns. 
Lastly I think we need to monitor the passing through of all losses to investors. At the moment this would be limited to the capital contributed to the relevant investor. I look forward to seeing the progress of these issues. National supports this legislation.