Tisch Lindsay: Limited Partnerships Bill — First Reading 
Tisch Lindsay: Limited Partnerships Bill — First Reading 
[Volume:641;Page:11324] 
LINDSAY TISCH (National—Piako) 
: 
 As members have heard from other National speakers we will be supporting the Limited Partnerships Bill. 
The key features have been articulated but I think it is important to reiterate them. Under this bill a limited partnership can be formed for any business purpose except for insurance and banking—and it is important to identify that—and is formed upon registration with the Companies Office. A limited partnership will be a separate legal entity—and that is significant—unlike a general partnership or a special partnership and any legal person may be a general or limited partner. A limited partnership must have at least one general and one limited partner. The function of the general partner is to manage the business of the limited partnership and the function of the limited partners is to provide money or assets to fund that business. The general partner will be liable for the debts and liabilities of the limited partnership. Limited partners’ liability will be limited to the amount of their contribution to the partnership. The bill also establishes safe harbours that allow limited partnerships to participate in the management of the investment partnership without tainting their limited liability status. 
Another important feature is the special partnerships which Dr Worth mentioned under the Partnership Act 1908. These are to be repealed although transitional provisions permit a special partnership existing on the commencement of the new Act to continue but not to be renewed at the end of its current 7-year term. 
I thought it would be appropriate to talk about and comment on the development of venture capital in New Zealand. Josh Lerner an expert in venture capital at Harvard Business School suggests that market failures have resulted in Government support being a factor in the initial development of all future venture capital markets. He goes on to identify three potential market failures. First there is 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 with the development of specialised venture capital skills and soft infrastructure involving lawyers accountants and business advisers with deep understanding of venture capital processes means that the 100th investment is considerably easier than the first investment. Third severe information asymmetries between venture capital firms and potential investees lead to the requirement that the size of an investment must be significantly large to justify the considerable due diligence costs involved in making investments. Similar asymmetries apply to young venture capital funds that have yet to develop a track record of success and that therefore have difficulty in securing funds from institutional investors. 
He goes on to say that 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 developing the professional venture capital industry in New Zealand. The scope for further development is considerable. For example the size of the New Zealand venture capital sector would need to increase at least fivefold to approach levels comparable with those of Ireland the United Kingdom and Singapore as a proportion of GDP. 
At a more micro level Lerner suggests that New Zealand’s current venture capital market under-services the New Zealand innovation system both in terms of the quantum of capital available from locally based funds and in terms of the breadth and depth of services provided by venture capital managers. It is likely to take quite some time for our venture capital market to mature into a self-sustaining industry. Because successful investments in start-up companies involve 7 to 10-year cycles the existing New Zealand Venture Investment Fund - supported funds will take several more years to develop successful track records to a point where they can attract funds from the majority of local institution investors which will then signal confidence to attract international institutions. In addition given the risks involved in venture capital it would be surprising if all five existing venture capital funds achieved the level of success necessary to continue in business. New funds will need to be established simply to maintain the venture capital market at its current size and further rounds will be required to grow the market towards international levels as a proportion of GDP. So this bill is very important in order for us to be able to meet what the learned Josh Lerner sees as some of the challenges facing venture capital in New Zealand. 
The limited partnership form will be familiar to overseas investors; it operates in other countries. The proposed structure is likely to be very useful for raising investment capital. Industries that have high start-up costs and/or high research and development budgets have significant upfront losses as a result. Examples would be biotech scientific and technology industries and possibly the film industry; all of those would benefit. The flow-through tax treatment allows losses on start-up to be passed through to investors which would be attractive to many of them. 
The limited partnership form offers protection to professional venture capital investors who will not be jointly and severally liable or responsible for the actions of the other partners. The question is whether this legislation is simply a measure to catch up with overseas practice or whether it learns from experience and positions New Zealand more favourably than close competitors for venture capital especially Australia. Examples could be management buy-outs new business opportunities or an investment option available to limited partnerships. National members will want to ask the following questions at the select committee. Are limited partnerships required to make a specified proportion of investments in New Zealand? And is investment permitted in listed and unlisted companies? 
Some law firms have suggested that thought needs to be given to the following issues. The first is the extent of the 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 and we will be looking at this issue particularly closely. Then there is the trigger point for someone becoming a limited partner and availing himself or herself of the protection of limited partner status. The draft bill places the obligation on the general partner to get it right. Another is the extent of the power in 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 3 years. Written partnership agreements are compulsory for limited partnerships but there is no test of their quality. There is the issue of the continued confidentiality of the names of investments of limited partners including where the information is contained in annual returns. Finally the passing of all losses through to investors is at the moment limited to the capital contributed by the relevant investor. These are issues that law firms have identified in this bill. They are certainly areas that National members will be looking at closely at the select committee. 
There are other advantages of course for small businesses in that the limited partnership will actually allow businesses to have management buy-outs. It will save them from having to list on the stock exchange where the compliance and reporting procedures can be too tough for some small businesses. So we could see a resurgence of money through private equity going into businesses. In fact the latest annual  
New Zealand Venture Capital Monitor 
 shows private equity investment up 250 percent in 2006 to $1.13 billion. But that is still behind Australia the United States and the United Kingdom. 
We will be looking closely in the select committee at the points I have raised. National supports the bill. It is very good legislation. 
Bill read a first time.