In their recent paper, Private Equity, Public Capital, and Litigation Risk, Professors Ludovic Phalippou and William Magnuson challenge the wisdom of a current trend in finance: retail investors’ increasing access to private equity (PE). The authors make compelling arguments—both about the imminent reality and risks of “retailization” and about the effects of the broader, long-term erosion of the public-private divide embedded in federal securities law.
Retailization, to be clear, is not new. Legislators, regulators, and courts have loosened constraints, allowing retail investors to access private equity through investment funds. Major law firms have engineered fund structures designed to channel retail capital into PE. The result is that PE firms, also known as alternative asset managers, began accepting retail capital through intermediaries more than a decade ago.
But retailization is set to accelerate markedly, thanks to President Trump’s August 2025 executive order permitting 401(k) plans to invest in alternative assets, including private equity. The order declares it “the policy of the United States that every American preparing for retirement should have access to funds that include investments in alternative assets” and directs the SEC and other agencies to reconsider regulations limiting access to private markets. With its push for “access,” the administration suggests that the order serves a democratizing purpose.
Phalippou and Magnuson offer a meticulous and persuasive riposte to retailization boosters.1 They don’t fully assess the merits of allowing PE firms to tap retail funding, but instead detail some of the underappreciated risks. Specifically, the authors argue that retailization is especially risky—not only for retail investors, but also, as it turns out, for private equity firms. These risks, “underappreciated by policymakers and scholars alike,” were in the past minimized by regulation keeping public, retail investors away from private investment vehicles like PE. But the guardrails keep falling away.
The authors identify multiple PE practices that especially disadvantage retail investors and illustrate the extent of these risks with clear, accessible examples.
One of these practices is the use by PE firms of internal rate of return (“IRR”) as a performance metric. Retail investors are particularly unlikely to grasp the quirks of IRRs and may therefore be misled by the metric, which can substantially overstate fund performance. In particular, IRR is often misunderstood as an investor’s annual rate of return. In fact, IRR measures something else entirely. And it is highly sensitive to the timing of cash flows, with the result that large early distributions can lock in a high IRR even when later performance is poor. Indeed, high IRRs are “easy to engineer,” making them look impressive to investors who don’t fully appreciate their meaning.
The article also shows that net asset value (“NAV”) calculations present similar dangers to retail investors. NAV depends heavily on manager-provided estimates, creating opportunities for manipulation. Empirical evidence suggests that firms inflate NAVs during fundraising periods to attract new capital and smooth valuations to obscure market volatility.
Another source of trouble for retail investors is non-transparent management fees. PE firms employ opaque fee provisions, giving managers broad discretion to load reimbursable expenses with a range of charges. Relatedly, the interaction between hurdle rates and catch-up provisions can effectively neutralize the investor protections that hurdle rates are intended to provide—another subtlety retail investors are unlikely to appreciate. Compounding these concerns, PE investors routinely waive fiduciary duties in limited partnership agreements, the practical significance of which retail investors may not appreciate.
The article’s most provocative contribution, however, lies in its argument that retailization isn’t risky only for investors but also for PE firms themselves. In particular, retailization exposes these firms to underappreciated litigation risk. The authors foresee a new generation of “private attorneys general” using litigation on behalf of retail investors to discipline PE firms.
Importantly, many potential claims already exist on behalf of the “sophisticated” institutional investors in PE funds. (The authors note that the “‘sophistication’ of these institutional investors has always been debatable” and add that sophistication “has served as a powerful tool for minimizing regulatory concern.”) No, “[i]nvestor litigation has . . . always been possible in the private equity industry, but it has rarely been pursued due to misalignments [of incentives] within institutional investors.” Retail investors have different incentives, though, and are far more likely to litigate when they perceive exploitation.
The article gives two reasons for retail investors’ expected willingness to litigate. First, as direct investors in PE funds rather than indirect investors through intermediaries, retail investors’ losses will be “personal and direct, giving them both the motivation and freedom to sue.” The second reason concerns the speed and effectiveness with which private litigation, driven by powerful incentives, can expose misconduct.
The paper offers valuable detail about what might come next—what legal perils PE firms may face from retail investors. These investors may collectively turn to actions in contract, tort, fraud, and consumer protection law—assuming that PE firms cannot impose arbitration clauses or class-action waivers. Fiduciary-duty claims might also be possible, if courts conclude that retail investors lack the sophistication necessary to consent to fiduciary waivers. At the moment, the exact nature of liability is speculative, so significant uncertainty remains: Will arbitration clauses be adopted and enforced? Will courts respect fiduciary waivers? Even so, the prospect of litigation, including class actions targeting the manipulative practices detailed in the article, is real.
While the authors persuasively argue that policymakers and scholars have underestimated these risks, it remains an open question whether PE firms themselves have done the same. Perhaps PE firms have good reason to invest their faith in the effect of arbitration clauses and class-action waivers. Perhaps they have already calculated that the benefits of accessing retail capital outweigh the costs associated with any litigation. It is also possible that firms that accept retail capital will be less exposed to these risks than their peers would be, presumably because firms accustomed to accepting retail investments will be more careful to avoid troubling practices that could expose them to liability.
Zooming out, Phalippou and Magnuson conclude that “there is nothing inherently democratic about extending risky, opaque, and ill-understood products to retail investors.” Instead of promoting rightful access, retailization further erodes a public-private divide that was democratically designed to protect public investors from exploitation. That regulatory framework, in theory, classifies investors and investments (companies, funds, etc) as either public or private, ensuring that PE funds draw capital exclusively from private investors, such as pension funds, university endowments, and family offices that are “accredited” or “qualified” under exemptions in federal securities law.
Yet reforms have whittled away at the force of the public-private distinction, even if it persists in theory. The result, as this valuable article argues, has been to create risks on multiple fronts. Time will tell whether those risks come to pass, but Professors Phalippou and Magnuson give good reason for concern.
- For another important contribution (which became available too late to include in this review), see William W. Clayton & Elisabeth de Fontenay, Private Equity for All: The Paradoxical Push to Democratize Private Markets, available at SSRN (Jan. 30, 2026).
