In our agency work in private fund manager dispute resolution cases, we have identified some common controversial points that determine the direction of relevant cases. This series of articles analyzes relevant issues from the perspective of safeguarding the rights and interests of fund managers. One of the articles in this series, "Consequences of Chapter 5 of the Nine People's Minutes" and How Private Fund Managers Should Respond "," How Private Fund Managers Demonstrate Fulfillment of Investor Suitability Obligations in Dispute Resolution ", and" How Private Fund Managers Refuse Investors' Claims for Rigid Redemption in Dispute Resolution ", are applicable to Chapter 5 of the Nine People's Minutes, respectively, And investors' appropriateness obligations and rigid cashing issues are analyzed. This article will discuss the issue of unfulfilled investment diligence obligations.

Laws and regulations such as the Securities Investment Fund Law of the People's Republic of China, the Interim Measures for the Supervision and Administration of Private Equity Investment Funds, and the self-discipline rules issued by the China Securities Investment Fund Industry Association all stipulate and require the integrity and diligence obligations of private equity fund managers in the operation and management of private equity funds. Private fund contracts often also stipulate in principle the investment diligence obligations of private fund managers. As an investment product with a certain threshold, private equity funds are often accompanied by high risks and high returns. Generally, in order to diversify investment risks, private equity funds may invest in multiple investment targets, while individual investment losses are inevitable. In civil and commercial disputes over private equity funds, investors often cite the failure of private equity fund managers to fulfill their investment diligence obligations as one of the reasons for pursuing accountability against private equity fund managers in accordance with the aforementioned provisions and contractual agreements. This article mainly discusses the defenses that private fund managers may adopt in this situation.

Based on our observation, judicial authorities usually evaluate whether private fund managers fulfill their investment diligence obligations from the following four perspectives:

1.Does the private fund manager take necessary pre investment risk management measures such as due diligence?

In judicial practice, whether private fund managers have taken pre investment risk management measures such as due diligence may be one of the criteria for investigation. Therefore, it is recommended that private fund managers properly retain relevant documents and manuscript materials during the operation of private fund investment, such as due diligence reports, due diligence drafts, process documents (including but not limited to emails, written signed documents, etc.) for project team members to sign/submit due diligence reports, and other pre investment risk management materials to support private fund managers' defenses. Due to the need to verify the authenticity of evidence in dispute resolution, in addition to retaining electronic documents, attention should also be paid to preserving the original documents in order to prove their authenticity. If the original media is in electronic form, such as email, care should be taken to store it on the server. Blockchain and other methods can be used to store electronic evidence when necessary to prove that it has not been tampered with. In addition, it should be noted that due to the absence of detailed provisions on the scope and depth of due diligence by private fund managers in relevant laws and regulations, judicial authorities may have greater discretion in evaluating the pre investment risk management measures of private fund managers. Therefore, private fund managers need to avoid obvious flaws.

2.Does the investment decision-making process of the private fund manager comply with the provisions of the fund contract?

Private fund contracts may specify the procedures for investment decisions. Whether to fulfill the approval procedures agreed in the fund contract may also be one of the criteria for measuring whether private fund managers fulfill their investment diligence obligations. Therefore, the private fund manager should perform the investment decision-making process in accordance with the fund contract, and retain corresponding process documents (including but not limited to the investment decision-making committee resolution) to support its own defense. In addition, in practice, in addition to private fund contracts, private fund managers may provide corresponding regulations on investment decision-making procedures in fund raising promotion materials and internal control systems. The internal control system may not be disclosed to investors, but the raising promotion materials are often provided to investors. It is recommended that private fund managers pay attention to controlling the consistency of investment decision-making procedures in various materials, so as to avoid disputes that may be identified as a breach of internal decision-making procedures and a failure to exercise due diligence.

3.Does the private fund manager take ex post facto rights protection measures?

Whether private fund managers actively take rights protection actions after investment problems may also serve as a measure of whether private fund managers fulfill their investment diligence obligations. In practice, when there is an investment loss, the private fund manager should promptly take legal or arbitration measures to safeguard their rights, and can support their own defense by submitting corresponding supporting documents (including but not limited to the indictment, application, judgment, or award, etc.).

4. Does the investment direction of private equity fund comply with the provisions of the fund contract?

Generally, private equity fund contracts specify the investment direction and scope of the fund. The judicial and judicial authorities may determine whether the private fund manager has fulfilled his or her diligence obligations based on whether the investment direction of the private fund conforms to the provisions of the fund contract. Due to the fact that once an investment occurs, it is a fait accompli and cannot be remedied afterwards, it is recommended that when determining the investment scope agreed upon in the fund contract, full consideration should be given to the investment fields that may be involved in the future, and a relatively broad investment scope should be agreed as far as possible. At the same time, when FOF is involved, the related party transaction clause design can eliminate FOF as necessary.

To sum up, considering the inevitable investment risks, it is recommended that private fund managers keep track of the entire process of private fund operation and management, properly retain them, abide by internal and external regulations, and make necessary judgments on the actual situation of subsequent performance when concluding fund contracts, especially the obligations of managers, in order to effectively prove the performance of their due diligence obligations in the future.