Fund rows without tears

AIFMD confusion makes mediation the most efficient solution to multi-jurisdictional funds disputes

Eileen Carroll

For several years the Alternative Investment Fund Managers Directive (AIFMD) from the EU hung over European fund management, creating uncertainty and an environment where even the finest legal minds can find it hard to understand what the law is (or might be) in crucial areas. On 22 July the directive came into force, intended to bring clarity and regulation to the market. However, its introduction seems to have made matters murkier.

In international multi-jurisdictional deals and transactions it is vital to bring as much certainty to bear as possible, outlining which legal codes will govern contracts, whether and where disputes will be litigated, a defined trigger point for disputes and a pathway for escalation. Including provisions for
mediation at an early stage can avoid the often complicated legal questions altogether.

Mix these uncertainties with  economic pressure on fund performance; once in a lifetime events like Lehman; local challenges in emerging markets; and the migration of funds as investors opt for friendly jurisdictions, and you begin to see how, if a dispute arose, it could be hard to find a clear legal path notwithstanding multi-jurisdictional provisions in a contract.

 In these conditions it is not surprising that alternative dispute resolution and particularly mediation is increasingly being used to achieve outcomes that make commercial sense. In fact, mediation is well-suited to complex cross-border disputes because it is not dependent on jurisdictional case law or
legal codes. It draws deeply on relationships, transparency and trust; and in mediations building (or rebuilding) working relationships are key to the success of a private equity venture.

One of the most striking things about private equity is how integral trust is to a successful fund. Without a good trusting relationship between the general partner and investors even profitable funds can run into trouble. A hint of suspicion or mistrust can cause a fallout that can quickly spiral into a full-blown dispute, especially when the reputation of a fund is damaged.

In one case, a single whisper of insolvency culminated in a multimillion pound, multi-jurisdictional dispute that escalated to include allegations of fraud. Left in the courts where proceedings were initiated the dispute would have continued to run long after the fund’s proposed wind-up date. Mediation helped the investors and general partner re-establish trust, giving control back to those with the most interest in getting it right.

There is also a transparency trend among investors that lawyers looking to add value should pay heed to. Private equity and all venture capital is increasingly public, and the days of Wizard of Oz-style governance and fee structures are  fading. Investors are not just peeping behind the curtain but making notes on the height of the wizard’s chair and questioning his methods. 

In the search for simplicity, it makes little sense to obfuscate and complicate with competing legal systems when working with a neutral party can achieve beneficial outcomes for all.