Private equity has long occupied a distinct corner of financial regulation. For nearly a century, the public–private divide defined how capital raising worked. Firms that tapped public markets were bound by extensive governance and disclosure rules. Firms that stayed private operated largely through contract, with minimal state intervention. The assumption underlying this architecture was simple. Ordinary investors needed protection. Sophisticated investors did not.
That divide is collapsing. Private equity firms, facing slower institutional fundraising and intense pressure to find new profit engines, are increasingly raising capital from retail investors through interval funds, tender offer funds, business development companies, feeder vehicles, and retirement-plan distribution channels. These products are marketed as innovations that democratize access to top performing assets. They are also, in practice, methods for drawing household savings into complex, opaque, lightly regulated structures that were designed for institutional negotiation rather than consumer protection.
Our paper, Private Equity, Public Capital, and Litigation Risk, argues that this retailization of private equity reshapes the regulatory landscape in ways the industry has not fully appreciated. Practices long tolerated in institutional settings take on new legal significance once ordinary investors are involved. At the same time, public regulators have stepped back. The consequence is an emerging regulatory gap that is likely to be filled not by administrative agencies but by private litigation.
The Erosion of the Public–Private Boundary
The convergence of public and private capital has been driven by multiple institutions acting in parallel.
First, Congress expanded exemptions that allow companies to raise capital without registering securities or disclosing information. The accredited investor definition has not been indexed to inflation, which means that a growing share of households now qualify as sophisticated by default. Legislative reforms such as the JOBS Act have also widened the channels for private capital raising.
Second, regulators have encouraged retail access to private market products. The SEC and Department of Labor have each relaxed long-standing limits on how retirement vehicles can acquire alternative assets. Recent rule withdrawals show the increasing political sensitivity around imposing new obligations on private funds.
Third, courts have curtailed the SEC’s ability to regulate the sector. In 2023, the Fifth Circuit invalidated the SEC’s private funds rule on the ground that private funds are meant to be governed by contract, not by public law. In 2024, the Supreme Court struck down the SEC’s use of administrative law judges, weakening its primary enforcement mechanism.
Finally, law firms have built the transactional machinery that allows private equity firms to access retail pools of capital while avoiding the governance and disclosure requirements that apply to public issuers. Internal presentations openly describe these structures as methods to raise ‘permanent capital’ with ‘private fund style fees’ from investors who do not qualify for retail protections.
The result is a world where private equity firms can raise capital from the public without being treated as public issuers. That regulatory arbitrage is central to the risks that follow.
Retailization Magnifies Long-Standing Structural Problems
The private equity model contains a set of design features that create significant conflicts of interest between managers and investors. They include performance metrics that do not measure what investors believe they measure, discretionary valuation methodologies, opaque fees charged at both fund and asset level, contractual waivers of fiduciary duties, and strict illiquidity with limited exit rights.
When investors were institutions with investment staff, legal resources, and long-term institutional relationships, these issues were partly mitigated. That logic breaks down once retail capital enters the picture.
Performance metrics. Internal rates of return (IRR) are widely presented as annual rates of return. They are not. IRR can be engineered through early distributions, use of subscription lines, and other timing strategies. Firms regularly report near-unchanging IRRs over decades. A retail investor has no reason to know that a ‘25 percent IRR since inception’ does not imply a 25 percent annual wealth gain.
Valuation methodologies. Net asset values in private equity are subjective and often influenced by fundraising incentives. Academic work documents systematic patterns of NAV inflation and smoothing. Semi-liquid funds compound the problem, since investors subscribe and redeem at those NAVs. Buying a secondary interest at a 20 percent discount and immediately marking it up to par is common and has immediate redistributive consequences for investors.
Fee structures. The familiar ‘two and twenty’ model masks a much larger universe of charges. These can include internal consulting fees, monitoring fees, portfolio company charges, broken deal expenses, and travel and entertainment costs. Institutional investors struggle to obtain visibility into these charges. Retail investors have none.
Fiduciary duty waivers. Fund documents often eliminate the duty of loyalty and the duty of care, allowing managers to compete with the fund, engage in self-dealing, and indemnify themselves except in cases of final non-appealable findings of fraud. These waivers sit uneasily beside the marketing of retail vehicles through regulated distribution platforms.
Liquidity. So-called semi-liquid structures usually permit redemptions of only 5 percent of NAV per quarter, subject to manager discretion. In periods of stress, exit may take years. These constraints are not intuitive to an investor accustomed to mutual funds or ETFs.
As retail investors enter structures built around these practices, the legal character of the relationship changes. The question becomes less about what sophisticated institutions can negotiate and more about what private law ultimately requires.
The Rise of Private Enforcement
Public enforcement has receded. But private enforcement is expanding. In our view, this is where the regulatory pendulum will swing next.
Private lawsuits bring different doctrines into play. They include:
Contract law. Many fund documents require managers to act reasonably or prudently and to provide financial statements that fairly present a fund’s condition. The implied covenant of good faith and fair dealing cannot be waived. It prohibits abuse of discretion and conduct that undermines the spirit of the bargain.
Fiduciary principles. Courts may be reluctant to enforce sweeping fiduciary duty waivers against retail investors. Conflicted transactions such as continuation funds expose managers to loyalty-based claims, especially when self-pricing is involved.
Fraud doctrines. Rule 10b-5 applies to all securities, not only those of public companies. Misleading performance marketing, inflated valuations, and opaque fee practices could all satisfy the materiality threshold once retail investors are involved.
Consumer protection laws. State unfair and deceptive practices statutes, many of which are private rights of action, prohibit conduct that is unethical or oppressive. UK and Commonwealth consumer protection regimes apply even stricter standards for product design, disclosure, and foreseeable harm.
Procedural mechanisms. The expansion of retail ownership makes class actions economically viable. Claims that are individually too small to litigate can be aggregated and pursued by specialist plaintiffs' firms. Forced arbitration clauses may be tested and, in some jurisdictions, may be unenforceable.
Foreign courts. Private equity managers with global investor bases face exposure under UK, EU, and Asia-Pacific regimes that often contain stronger consumer and fiduciary doctrines, as well as more permissive collective redress mechanisms.
The overall effect is a shift from public-law regulation to private-law regulation. Courts rather than agencies may become the main enforcers of discipline in private markets.
A Judicial Future for Private Equity
Private equity has flourished in a world of contractual freedom, opaque economics, and limited oversight. Retailization changes the equilibrium. What was once a negotiated relationship among institutions becomes a consumer relationship governed by doctrines that are broader, stricter, and more plaintiff-friendly. If regulators remain reluctant to intervene, courts may reshape the industry instead.
The authors’ full paper is available here.
Ludovic Phalippou is a Professor of Financial Economics at the Saïd Business School, University of Oxford.
William Magnuson is a Professor of Law at Texas A&M University School of Law.
OBLB types:
Research
Share:
With the support of
