Due to the low returns of traditional investments, investments are increasingly being made in alternative investment vehicles such as hedge funds, real estate funds, private equity and private debt funds or shipping CVs. Resolving conflicts over these types of funds requires a specialist approach.
Conflicts related to investment funds
Conflicts can arise, among other things, from a sharp fall in the value of the fund’s assets and/or its participations rights, a suspension of redemption of participations, a change of manager of investment strategy and/or in case of liquidation or merger of the fund.
Liability of the fund manager
The fund manager may be liable for investment losses if such losses are caused by its negligence and/or breach of the investment terms. In such cases, losses are not solely attributable to market conditions but als to, sometimes even to a large extent, to errors or omissions on the part of the fund manager. The main grouds for liability of the fund manager under Dutch law are publishing a misleading prospectus and/or financial statements, breach of the investment terms, e.g. by deviating from the agreed investement strategy (‘style drift’) or failure to implement proper risk management policies. Sometimes the manager may also violate state securities laws, e.g. by offering investments without the required license or a prospectus approved by the AFM or other desginated regulator.
Suspending buy-back of participation rights
In an open-end fund, the investor has the opportunity to offer his participation rights for purchase to the manager in exchange of payment of the intrinsic value of such rights. Often this is only possible after a certain time after the investor has purchased the pariticipations (‘lock-up period’). Also, the fund terms often give the manager the right to suspend redemption in case of unusual market conditions or a large outflow of investors (‘gate’). If the use of this gate is unjustified, unnecessary or unreasonable, the investor may attempt in summary proceedings to enforce the redemption of his participations. Sometimes the fund terms allow for the seperation of illiquid or otherwise problematic assets into a seperate fund (‘side pocket’) and continue redemption based on the value of the assets remaining in the fund.
Liquidation or merger of the fund
Liquidation or merger of the fund may well bee unfavourable to investors. First, this often leads to a change of fund manager and/or investment strategy, which may change the nature and/or risk profile of the fund. In addition, in many cases illiquid fund assets are sold or transferred at considerable discounts, lowering the value of the participation rights in the fund. The risk of conflicts of interest and non-commercial (e.a. not at arm’s length) transactions may clearly be lurking. Therefore, investors in the fund may be wise to take an active stand in the liquidation or merger process, preferably as a group. If necessary, the appointment of an independent supervisor to the process and/or suspension of the liquidation or merger pending independent auditing may be enforced, for example through a summary proceedings.