Investor communications are a core part of fund operations, but few moments test a manager’s judgment more than deciding when and how to notify investors of a material adverse event (MAE). These events, ranging from key personnel departures to regulatory investigations or portfolio company distress, can trigger reputational risk, legal obligations, and investor scrutiny. Yet, the rules around disclosure are often more interpretive than prescriptive.
This article outlines a practical framework for identifying, evaluating, and communicating MAEs to investors in a way that is timely, defensible, and aligned with industry expectations.
What Constitutes a Material Adverse Event?
There’s no universal definition, but MAEs generally include events that could reasonably be expected to:
Impair the fund’s ability to execute its strategy
Impact the value of the portfolio or investor returns
Trigger a key person, removal, or suspension clause
Result in regulatory, legal, or reputational consequences
Examples include:
Departure of a named key person
SEC or DOJ investigations
Portfolio company bankruptcy or fraud
Breach of fund covenants or side letter terms
Cybersecurity breaches affecting fund data
The threshold for “materiality” is often defined in the LPA or side letters, but even when it’s not, managers are expected to apply a reasoned, investor-centric lens.
When to Notify Investors
Timing is critical. Too early, and you risk creating unnecessary alarm. Too late, and you risk breaching fiduciary duties or contractual obligations.
A good rule of thumb: notify when the event is confirmed and its potential impact is reasonably understood, not necessarily when all facts are known.
Considerations include:
Contractual triggers: Does the LPA or side letter require notice within a specific timeframe?
Regulatory expectations: Would a delay in disclosure appear misleading or negligent in hindsight?
Investor relations: Would investors feel blindsided if they heard about the event from another source?
In practice, many managers opt for a short initial notice followed by a more detailed update once facts are confirmed.
How to Communicate the Event
The tone and format of the communication matter as much as the content. Investors want clarity, not spin.
A typical MAE notice includes:
What happened - A factual summary of the event
When it happened - Timeline of discovery and confirmation
Why it matters - Potential or actual impact on the fund
What’s being done - Steps taken to mitigate or resolve the issue
What’s next - When investors can expect further updates
Avoid legalese or overly defensive language. The goal is to demonstrate transparency, control, and alignment with investor interests.
Illustrative Examples
Here are a few examples to help contextualize how MAEs might arise and be handled:
Key Person Departure: A named investment partner unexpectedly resigns. The LPA includes a key person clause requiring LPAC notification within 10 business days. The manager sends a brief notice within 48 hours, followed by a detailed update after internal succession planning is finalized.
Regulatory Investigation: The fund receives a formal inquiry from the SEC regarding valuation practices. While the outcome is uncertain, the manager notifies LPs within the quarter, citing the inquiry and outlining steps being taken to cooperate and review internal controls.
Portfolio Company Bankruptcy: A portfolio company representing 15% of fund NAV files for Chapter 11. The manager issues a notice within a week, explaining the situation, expected recovery scenarios, and impact on fund performance.
Cybersecurity Breach: A third-party service provider experiences a data breach affecting investor records. The manager notifies LPs promptly, even though no financial loss has occurred, and outlines remediation steps and monitoring protocols.
These examples show how materiality is often situational, but the common thread is proactive, transparent communication.
Operational Best Practices
Pre-draft templates: Have a basic MAE notice template ready to customize.
Internal escalation protocols: Ensure legal, compliance, and IR teams are looped in early.
Board or LPAC coordination: Involve governance bodies when appropriate.
Documentation: Keep a record of internal deliberations and communications for audit or regulatory review.
Bottom Line
Material adverse events are inevitable in long-term fund management. What matters is how they’re handled. A disciplined, transparent approach to investor notification, grounded in contractual obligations and investor trust, can turn a difficult moment into a demonstration of operational maturity.