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Recently, the author concluded a trial involving a private equity fund dispute marked by intense adversarial arguments. Previously, the author published Guidelines for Rights Remedies in Private Equity Investment Disputes (I), which outlined core claims and procedural options from an investor’s perspective. Drawing on that article and the newly concluded trial, this paper elaborates and discusses the highly contentious issue at the hearing: losses.

In practice, disputes over private equity funds rarely centre merely on whether the opposing party is at fault. The bulk of controversies revolve around the question of loss: If the fund has not yet been liquidated, is the loss deemed to have occurred? How should the principal awarded by the court be calculated, what interest rate applies, and can agreed expected returns be claimed? If the underlying assets still exist, does that mean no loss has arisen? Among fund managers, distribution institutions, custodians and sales personnel, who bears the loss and in what proportion? This article systematically sorts out investor loss issues in the sequence: nature of loss — whether loss has materialised — scope of loss — loss and underlying assets — apportionment of loss.

I. Different meanings of “loss” under different causes of action

In financial transactions, we often hear the maxim “Investment carries risks; caution is advised before entering the market”. For investors, risk translates into loss, most directly in monetary terms. Private equity funds are not principal-guaranteed products. It is common for investors to suffer principal losses, sometimes losing nearly all their investment. The key question is: under what circumstances should such losses be borne by the investor as market risk, and when may the investor seek compensation from others?

A mere principal shortfall for an investor does not automatically constitute a compensable “loss” actionable against third parties. A disadvantageous position qualifies as a legally recoverable loss only if a counterparty with a valid legal relationship commits a breach, illegal act or fault, and a causal link exists between such conduct and the investor’s detriment. Different legal relationships give rise to different causes of action, and correspondingly different definitions of loss. Based on the author’s case experience, four common scenarios arise in private equity fund disputes:

Scenario 1: Restitution and damages following contract invalidity or rescissionPursuant to Article 157 of the Civil Code of the People’s Republic of China: “Where a civil juristic act is invalid, revoked or confirmed not to take effect, a party who obtains property as a result of the act shall return such property; if return is impossible or unnecessary, compensation shall be made at assessed value. The party at fault shall compensate the other party for losses incurred thereby; where both parties are at fault, each shall bear corresponding liability.” Where a contract is terminated, Article 566 of the Civil Code governing restitution and damages applies. In this scenario, loss generally takes the form of invested capital paid and interest on funds held, independent of the profit or loss of fund operations.

Scenario 2: Damages for breach of contract by the fund managerWhere a fund manager breaches its duties of diligence, information disclosure or agreed investment obligations, investors may claim breach-of-contract remedies under the fund contract. Article 145 of the Securities Investment Fund Law of the People’s Republic of China provides: “Where a fund manager or fund custodian, in performing their respective duties, violates this Law or the fund contract and causes harm to fund property or fund unit holders, they shall separately bear compensation liability for their own conduct in accordance with law; where harm is caused by joint conduct, they shall bear joint and several liability.” Loss here is normally determined on the basis of the final profit or loss of the fund property, and liquidation disputes mostly emerge within this category of litigation.

Scenario 3: Compensation for breach of suitability obligations by sell‑side institutionsCauses of action for such claims are rooted in culpa in contrahendo (Article 500 of the Civil Code) or general tort liability (Article 1165 of the Civil Code). Paragraph 77 of the Minutes of the National Civil and Commercial Trial Work Conference states: “Where a sell‑side institution fails to perform its suitability obligation and causes loss to a financial consumer, it shall compensate the consumer for actual losses suffered. Actual loss means lost principal plus interest, calculated at the benchmark deposit interest rate for the same period published by the People’s Bank of China.” The underlying logic is that, had the sell‑side institution complied with suitability rules, the investor would not have purchased the unsuitable product. The loss is therefore the principal paid and unrecoverable, plus the cost of funds being tied up.

It should be noted that “sell‑side institution” is not limited to third‑party distributors. Where a manager carries out self‑raising, the manager itself qualifies as the sell‑side institution. Where distribution is entrusted to a sales agency, the distributor bears direct suitability obligations, while the manager may also be held liable depending on circumstances. Case law also exists in which employees of private equity firms, who participated in promotion and contracting in a personal capacity, have been ordered to bear partial compensation liability.

Scenario 4: Fault‑based compensation after invalidity of capital‑guarantee or fixed‑return promisesIn practice, many investors purchase products only because sales staff or managers promised capital preservation and guaranteed returns. Paragraph 92 of the Minutes of the National Civil and Commercial Trial Work Conference provides that where a financial institution, as trustee of an asset management product, enters into a contract containing capital‑guarantee or fixed‑redemption clauses, “the people’s court shall rule such clauses invalid. Where the beneficiary requests the trustee to bear compensation liability commensurate with its fault for the losses, the people’s court shall uphold such claim in accordance with law.” This means that once guarantee clauses are invalidated, investors cannot claim returns under the void guarantee terms, and may only recover actual losses apportioned according to each party’s fault.

The composition, time of ascertainment and calculation methodology of “loss” differ across these four scenarios. An investor must clarify the legal route before filing suit, which forms the prerequisite for debating subsequent loss‑related issues.

II. Whether loss has occurred: Is liquidation a prerequisite?

“The fund has not completed liquidation, so losses cannot be quantified” is the defence most frequently raised by respondents. Judicial practice does not adopt a blanket rule; analysis is fact‑specific.

(A) General rule: Liquidation results form the basis for loss quantification

In claims against managers for investment losses, courts generally hold that fund assets are independent of the manager’s own property, and final fund profit or loss remains uncertain before liquidation concludes. Three mainstream judicial treatments apply depending on the fund lifecycle:

Where the fund term has not expired: Compensation for loss will ordinarily be denied. In cases such as (2019) Zhe 0104 Min Chu No. 8882 and (2020) Zhe 0212 Min Chu No.1730, courts held that “the fund contract has not matured, assets have not been realised and liquidation conditions are unmet; profit or loss cannot be confirmed”.

Where the term has expired but liquidation is pending: Loss is generally still indeterminate. In (2020) Hu 74 Min Zhong No. 567, the court ruled that it was uncertain whether the investor’s post‑liquidation units would generate profit or loss and the magnitude thereof, while confirming the investor’s separate right to sue to compel the manager to perform liquidation duties.

Where liquidation has commenced but remains incomplete: Claims may be dismissed as premature. In (2020) Jing 0101 Min Chu No.6865, the court found investment losses “unascertained, and a claim for investment loss brought at this stage is premature”, while noting that investors may bring separate proceedings if the manager persistently defaults on liquidation obligations.

(B) Exceptions: Liquidation results are important, not the sole, criterion

Requiring completion of liquidation in every case would enable managers to indefinitely delay liquidation and block investor remedies, which would be inequitable. Courts will therefore dispense with the liquidation prerequisite and confirm realised loss where the manager’s fault objectively frustrates normal liquidation or the investor’s loss is substantially fixed. Key circumstances include:

Fund assets are out of control and recovery is objectively impossible. Illustrative cases: (2021) Hu 74 Min Zhong No.1626, (2020) Hu 74 Min Zhong No.1046, involving misappropriation of fund assets, failure to acquire agreed target equity, and inability of liquidation teams to take control of fund property.

The manager diverts funds and invests contrary to the agreed investment scope. In (2021) Jing 0108 Min Chu No.14362, the court rejected the manager’s defence based on “failure to liquidate promptly”.

The manager is incapable of completing liquidation for its own reasons, e.g. being subject to criminal investigation ((2020) 0105 Min Chu No.65456) or absconding ((2021) Jing 03 Min Zhong No.9999).

Material breach by the manager causing liquidation delay. In (2020) Jing 0117 Min Chu No.621, the court held that an investor should not bear extended prejudice due to the manager’s default in timely liquidation. It rendered an interim award ordering compensation, with sums recovered in subsequent liquidation to be deducted later.

(C) Loss ascertainment in suitability‑obligation litigation

In suitability claims, the loss arises from a transaction that ought never to have happened; this is separate from the fund’s operational profit and loss. Logically, loss need not be proven by finished liquidation. That does not mean courts dispense with review of whether loss has materialised. In practice, courts assess whether the investor’s principal is irrecoverable by reference to the product’s status and redemption track record.

In one of the author’s litigated matters, the fund had a 48‑month term expiring in 2021. The manager’s extension notice contained no clear commitment on investor exit timelines. By the second‑instance hearing, more than three years had elapsed since maturity with no distributions. The court held: “Given that over three years have passed since maturity and no distributions have been made, the loss alleged by the plaintiff is established.”

Three cumulative factual elements supported this finding: the fund term expired; extension notices contained no definite exit timetable; and a substantial period after maturity passed without distribution. The court also clarified that if distributable proceeds emerge post‑judgment, such sums accrue to the liable distribution institution. This mechanism prevents double recovery by the investor and shows the court accounts for future liquidation proceeds when finding loss.

(D) Breach of duty and occurrence of loss are separate elements

A respondent’s fault does not automatically guarantee an award of damages. Harm, causation and fault are distinct constituent elements. Even after finding a sell‑side institution breached suitability obligations, courts independently verify whether loss occurred and whether the breach caused the loss.

Paragraph 78 of the Minutes of the National Civil and Commercial Trial Work Conference explicitly provides: “Where a financial consumer purchases a product or receives unsuitable services due to supplying false information intentionally or refusing the institution’s advice, and the sell‑side institution seeks exemption, the people’s court shall uphold such application... Where the sell‑side institution proves that, based on the consumer’s prior investment experience, educational background and other facts, the suitability breach did not affect the consumer’s autonomous decision, the people’s court shall accept the defence that the consumer must bear investment risk personally.”

In practice, courts may break the causal chain and dismiss compensation claims where investors submit false income certificates to qualify as qualified investors, sign written confirmations to proceed notwithstanding explicit risk mismatch warnings, or possess longstanding financial industry experience such that their investment decision did not rely on the institution’s recommendations.

III. Scope of loss: Principal, interest and returns

Once loss is established, the quantum of damages is investors’ core concern.

(A) Principal loss

Principal loss is calculated in principle as the capital actually subscribed by the investor, minus all prior distributions, redemptions and other recoveries. The legal foundation is that liability for breach of suitability obligations constitutes culpa in contrahendo; compensation covers reliance loss only, aiming to restore the investor to the pre‑contract economic position. It is therefore limited to invested capital not recovered, excluding expected product returns.

Evidence-wise, principal is proven primarily by bank statements and contractual documents. Payment records from the investor’s personal account to the fundraising account, the fund/asset management contract identifying the investor and subscription amount, and the manager’s subscription confirmation or investment certificate, when mutually corroborative, suffice to prove the investment quantum. The sell‑side institution bears the burden of proof for any deductions it asserts.

(B) Interest loss

Interest, i.e. the cost of funds detained, is the most heavily contested component. In suitability litigation, Paragraph 77 of the Minutes sets the general benchmark as “benchmark deposit interest rate for the same period published by the People’s Bank of China”.

Several practical nuances deserve attention:

Calculation base: Courts apply interest to the awarded amount (e.g. 75% of principal corresponding to the liability percentage), not the full invested principal.

Commencement date: Interest runs from the date of investment payment until full satisfaction of judgment.

Rate benchmark: In the author’s case, the investor claimed 8.5% p.a. interest relying on promotional material citing a benchmark return of 8.5% p.a., which was rejected by the court.

To depart from the deposit benchmark rate, an investor must prove fraud. Paragraph 77(2) of the Minutes governs interest where the sell‑side institution has committed fraud:

(1) Where the contract states an expected return, performance benchmark or similar term, this may serve as the interest benchmark; (2) Where the contract states an expected return or performance benchmark as a floating range, the court may uphold a claim for the upper bound of the range; (3) Where the contract lacks such terms but the investor provides admissible advertising materials containing such return statements, the promotional materials form part of the contract; (4) Where neither contract nor advertising materials state expected returns or benchmarks, interest shall be calculated at the Loan Prime Rate (LPR) published by the National Interbank Funding Center.

Reviewing over a dozen suitability judgments collected by the author, courts uniformly apply the deposit benchmark rate in operative awards. Claims for LPR or contractual yield rates are almost never granted. Accordingly, if promotional materials cite definite returns and the investor can prove misrepresentation or material non‑disclosure, fraud should be pleaded expressly from the outset to invoke Paragraph 77(2). Otherwise, interest expectations should be aligned with the deposit benchmark rate.

(C) Expected returns and punitive damages

Private equity funds carry no principal or return guarantee. Performance benchmarks in fund contracts are not return promises from the manager. In ordinary circumstances, claims for expectation damages based on expected returns or performance benchmarks are rarely upheld. The same applies to invalid guarantee clauses: investors recover only actual loss apportioned by fault, and cannot rely on void guarantee promises for return claims.

Regarding punitive damages, Paragraph 77(2) clarifies that courts reject claims for punitive damages under Article 55 of the Consumer Rights and Interests Protection Law premised on fraud by financial institutions.

IV. The relationship between loss and underlying assets

The value of a private equity fund ultimately derives from its underlying assets. In investment loss litigation, the state of underlying assets directly determines whether loss is proven and its quantum. Respondents in suitability actions frequently argue “the underlying assets remain intact” or “the underlying enterprise operates soundly” to deny loss. This relationship must be analysed along three dimensions:

(A) Holding underlying assets is not equivalent to investor recoverability

Investor returns are realised only through the chain: underlying asset realisation → fund distribution. For closed‑end products distributing upon maturity, investors care less about operating metrics of underlying portfolio companies and more about whether assets can be monetised and distributed within a reasonable timeframe.

In a case handled by the author, the product held equity indirectly via multiple limited partnership layers in a company delisted overseas and traded over‑the‑counter. Upon maturity, the manager’s liquidation announcement admitted the underlying assets “cannot be exited within the projected timeline”, and distributions would follow asset realisation without a fixed deadline, while only a small cash pool was available for distribution. Even with acceptable operating indicators for the underlying enterprise, the respondent’s argument that “high underlying value means no investor loss” conflates corporate operating health with the realisable value of investor interests. An asset that cannot be sold, distributed or reliably timed for recovery has no present realisable value for the investor.

(B) Evidentiary burden for underlying asset information

Valuations, disposal progress and liquidation reports for underlying assets are almost exclusively held by managers and distributors and are rarely accessible to investors. Paragraph 75 of the Minutes provides: “In litigation, the financial consumer bears the burden of proving purchase of the product (or receipt of services) and the occurrence of loss. Sell‑side institutions bear the burden of proving compliance with suitability obligations.”

The investor therefore bears an initial evidential burden for loss, which can be discharged via AMAC disclosures, termination notices, liquidation announcements and bank statements confirming non‑receipt of distributions. A respondent asserting “high underlying asset value and no investor loss” must support that contention with audit valuations and net realisable value evidence. Where the respondent controls such documents and refuses production, the investor may apply for an evidence production order under Article 112 of the Judicial Interpretation on the Civil Procedure Law. If the controlled party refuses without justification, Article 95 of the Rules of Civil Evidence permits the court to adopt the investor’s allegation that the document is adverse to the custodian.

(C) Subsequent recovery of underlying assets and prevention of double recovery

Where loss is found before liquidation concludes, respondents worry that investors may receive both judgment compensation and later liquidation distributions. Courts adopt two common solutions: (1) post‑judgment distributable proceeds vest in the liable party; or (2) an immediate damages award is entered, with future liquidation receipts deducted from the award. Investors may proactively consent to this framework in pleadings, which facilitates the court’s finding that loss has already materialised.

V. Apportionment of loss: Who pays, and in what proportion?

(A) Liability forms among multiple responsible parties

Fund raising, investment and operation involve managers, sales institutions, custodians and practitioners, each with distinct duties and liability regimes. Under Article 145 of the Securities Investment Fund Law, managers and custodians are separately liable for their own misconduct, and jointly and severally liable for joint misconduct causing harm.

Case law reviewed by the author shows wide variance in allocated liability percentages. In (2024) Yue 03 Min Zhong No.36999, the court apportioned 75% liability to the distributor. In multiple custodian‑liability cases heard by the Shanghai Financial Court, custodians with faults in investment review were ordered to bear 10% liability; custodian appeals contesting the percentage were dismissed, with the court referencing the benchmark precedent (2024) Hu 74 Min Zhong No.239 for consistent adjudication. In (2025) Yue 01 Min Zhong No.22531 from Guangzhou Intermediate People’s Court, an employee of the private equity firm personally participating in promotion and contracting was ordered to bear 30% of the investor’s loss.

When selecting defendants, investors should not target only one party. If a custodian exists and investment misallocation is proven, joining the custodian as a defendant improves prospects of recovery.

(B) Reduction for investor contributory fault

Even where the respondent’s liability is established, courts adjust damages to account for investor fault. In some judgments, courts hold investors “ought to recognise investment risks and bear corresponding market risk; having raised no objection to the investment target for years after payment and contracting, the investor is partially responsible for the loss”, resulting in a 25% self‑attributable share of loss.

This reminds investors to submit written objections and assert rights promptly once encountering extensions, suspended redemptions or disclosure irregularities. This limits the scope for damages reduction based on “delay in raising objections” and supports limitation period arguments.

VI. Concluding practical recommendations

Define your cause of action before addressing loss. The four pathways — restitution for invalid contracts, manager breach, sell‑side suitability liability, and compensation for invalid guarantee clauses — each carry different loss composition and quantification rules. Before commencing proceedings, select the most advantageous route on the basis of available evidence, and bring separate claims against different parties where appropriate.

Do not allow pending liquidation to extinguish the limitation period. Article 188 of the Civil Code provides that the limitation period commences when the claimant knows or ought to know that its right has been infringed and who the obligor is. Courts often fix the start date upon receipt of extension notices, not the date of sale. Investors must assess and assert rights promptly after receiving notices of extension, liquidation or suspended redemption, rather than passively awaiting liquidation outcomes.

Preserve evidence relating to loss upfront. Payment vouchers, fund contracts, subscription confirmations, distribution records, extension and liquidation notices and AMAC disclosures are core evidence for proving principal loss and loss occurrence. Promotional materials and chat records referencing yields are critical to establishing fraud and potentially overcoming the deposit benchmark interest rate cap, and should be preserved in full.

Maintain realistic expectations for litigation outcomes. Based on existing precedents, principal amounts are usually fully recognised, but the final compensation percentage may be discounted for investor contributory fault. Interest is mostly awarded at deposit benchmark rates; recovery at the contractual promised yield requires proof of fraud.

Loss sits at the heart of private equity fund disputes and is the primary source of contention between parties. Only by clarifying whether loss has materialised, its scope, its connection to underlying assets and the allocation of liability can investors pursue remedies effectively, without being stalled by calls to “wait for liquidation”, while avoiding unrealistic expectations of recovery.