For much of the past decade, strong fundraising, rising asset values and readily available liquidity helped contain tensions that might otherwise have developed into disputes. Where performance remained strong and exits could be achieved, disagreements between fund managers1 and investors could often be resolved commercially.
The environment has become more difficult. Longer holding periods, fewer exits, valuation uncertainty and greater investor scrutiny are putting pressure on relationships across private markets. In our experience, this is not only leading to more disputes but also changing the issues around which they develop.
Fund disputes rarely start with a formal claim. More often, ordinary features of the relationship gradually become contentious. A capital call is questioned. An investor asks for the documents behind an explanation. Concerns over valuation develop into concerns over liquidity. Governance procedures which previously attracted little attention are examined more closely.
A fund relationship often enters a pre-dispute phase when cooperation gives way to verification and commercial discussion gives way to the strict exercise of legal rights. At that point, procedural or documentary issues which once appeared technical can become central to the parties’ respective positions.
Five warning signs tend to recur.
1. Routine notices come under legal scrutiny
Capital calls are a good example.
In normal circumstances, a drawdown notice is largely an operational matter. When the relationship starts to deteriorate, investors may begin to ask whether the call was made by the person or body with the requisite authority under the fund documentation and for a permitted purpose. They may also question whether the relevant commitment remained callable at the time and whether the applicable procedural requirements were followed.
Similar questions can arise around distributions, redemptions, extensions of the fund term or other recurring fund mechanics. The scrutiny may become more acute where a manager seeks to invoke default provisions or other contractual remedies, since the consequences can be significant and strict compliance with the fund documentation is likely to be tested.
Once a party starts testing whether a routinely exercised power was available in the circumstances and validly exercised, the issue is no longer merely operational.
Formal requirements, notice periods, contractual time limits and the allocation of authority under the fund documents may then take on a significance which was not apparent when the relevant step was first taken. A defect may later affect the enforceability of a notice, the availability of a remedy or the leverage available to one side in the dispute.
2. Explanations are no longer accepted without supporting documents
Requests for information are a normal feature of the relationship between fund managers and investors. The position becomes more sensitive when explanations are no longer regarded as sufficient.
An investor may, for example, ask not only why a capital call was made, but for the underlying calculations and details of previous drawdowns. Questions about portfolio performance may lead to requests for valuation materials or board records. Concerns about a particular decision may result in requests for evidence of the authority under which it was taken.
At that point, the focus has shifted from understanding the decision to testing the basis on which it was made.
At the same time, the scope of an investor’s information rights may itself become contentious. Those rights may derive not only from the fund documentation and side letters, but also from Luxembourg company law. Their scope may nevertheless have to be reconciled with confidentiality obligations and third-party rights. The question is therefore not only whether the fund manager can substantiate its position, but also what information the investor is legally or contractually entitled to receive.
The documentary record may then matter as much as the substantive explanation. The relevant decision-makers should consider whether the fund documentation, corporate or committee records, investor communications and the actual decision-making process are consistent with one another.
The same is true where conflicts of interest are involved. If a decision concerns related parties, competing investor interests or an exercise of discretion, the contemporaneous record of how the issue was identified, considered and addressed may later become part of the dispute itself.
3. Valuation concerns become liquidity concerns
Valuation is an obvious area of sensitivity in private markets. It affects reported performance and, depending on the structure, the economics of redemptions, restructurings and exits.
In practice, valuation disputes often become more serious when they coincide with concerns about liquidity.
In closed-ended funds, investors may question why assets continue to be held, why the life of the fund is being extended or whether a proposed continuation or secondary transaction reflects fair value. The fund manager may consider that holding an asset for longer will maximise returns, while some investors may prefer an earlier exit.
In open-ended funds, the issue can crystallise more abruptly. Concerns over the calculation or suspension of NAV, or restrictions on or suspensions of redemptions, can bring valuation and liquidity questions together immediately.
None of those measures is necessarily improper. A suspension may be expressly permitted by the fund documentation and justified by the circumstances. The difficulty arises when investors begin to question whether the relevant contractual conditions were met, whether the valuation process remained reliable or whether they are being prevented from realising their investment on a basis which is properly supported.
The resulting dispute is therefore often not simply about whether a valuation is “right”. It may concern whether the agreed valuation process was followed, whether the underlying assumptions were supportable, whether the relevant decision-makers acted within the scope of their powers and whether conflicts were appropriately addressed.
4. Investor protections become active points of contention
Fund documentation typically contains a range of protections intended to regulate particular situations during the life of the fund. Depending on the structure, these may include investor consent rights, LPAC consultation or approval mechanisms, conflict procedures, key person provisions, amendment thresholds, term extension mechanisms, removal rights and rights granted under side letters.
For much of the life of a fund, many of these provisions may remain largely in the background. Their significance changes when investors begin to scrutinise whether the circumstances triggering them have arisen or whether the manager has complied with the conditions attached to their exercise.
A proposed term extension may lead investors to examine the applicable consent threshold and the information on which the extension is being sought. A conflict involving the manager or an affiliate may raise questions as to whether the matter should have been referred to the LPAC and whether the prescribed process was followed. A key person event, amendment to the fund documentation or exercise of a removal right may give rise to similar questions as to trigger events, voting thresholds, procedural requirements and the consequences of non-compliance.
Side letters can add another layer. Rights granted to individual investors may differ from those contained in the main fund documentation, and their interaction with the LPA, constitutional documents and arrangements with other investors can become important once a dispute develops.
The warning sign is therefore not that investors are seeking to participate in the day-to-day management of the fund. It is that protections which were designed to operate at specific points in the fund’s life are being actively tested, invoked or challenged.
At that stage, the dispute may turn on relatively technical questions: whether a contractual trigger occurred, whether the correct investors were consulted, whether the required majority was obtained, whether a conflict procedure was properly followed or whether an investor-specific right modifies the position under the principal fund documents.
Those issues can materially affect the validity of the step taken and the rights and remedies available to the parties.
5. Communications become litigation-conscious
The final warning sign is often visible in the way the parties communicate.
Informal exchanges become more formal. Rights are expressly reserved. External advisers become involved. Notices are reviewed more carefully and parties become increasingly conscious of how their communications and decisions would appear if the matter later came before a court or tribunal.
This change in behaviour often precedes any formal claim.
Once litigation or arbitration becomes a realistic possibility, parties should assess not only the merits of the underlying dispute but also the procedural architecture around it: contractual time bars, notice and escalation requirements, governing law and jurisdiction or arbitration provisions, and the availability of interim or protective relief.
This is also the point at which procedural mistakes can become difficult to correct. A missed deadline, an incorrectly issued notice or an inconsistent explanation may later constrain the arguments available to a party or give the other side additional leverage.
A commercial solution may still be possible. Indeed, early legal analysis can sometimes make one easier by clarifying the parties’ positions before avoidable procedural issues make the dispute harder to resolve. By that stage, however, each party is also beginning to assess how its conduct, decisions and communications may affect its position in any future proceedings.
When the relationship enters the pre-dispute phase
There is rarely one moment at which a fund dispute begins.
More often, the warning signs overlap. Routine mechanics are challenged. Explanations require documentary support. Valuation concerns become linked to liquidity. Investor protections and contractual safeguards are increasingly tested. Communications become more legalistic.
The practical question is therefore not simply whether a claim has already been threatened. It is whether the parties are still trying to solve the same commercial problem or have started building competing legal positions around it.
At that stage, the available strategy may extend well beyond litigation or arbitration. Depending on the fund structure and its documentation, investors may consider exercising contractual rights relating to the removal or replacement of the general partner or manager, termination of the investment period, refusal of an extension, or, in more serious cases, liquidation of the fund. Other situations may be better addressed through a negotiated restructuring, secondary transaction or agreed exit.
Those mechanisms should not be viewed as purely commercial alternatives to proceedings. Their availability will usually depend on specific contractual triggers, voting thresholds and procedural requirements, and their exercise may itself become contentious.
Early legal intervention therefore serves two purposes: preserving the ability to bring or defend a claim if necessary, while identifying whether the fund documentation offers a more effective route to resolve or reshape the relationship before formal proceedings become inevitable.
1 In this article, “fund manager” is used as a general term to refer to the person or entity responsible for the management or operation of the fund, which may include, depending on the structure, the general partner, alternative investment fund manager, investment manager or another management entity.
