The expected flood of retail money into private assets facilitated by the Trump administration probably won’t result in a wave of litigation against private equity firms, according to market experts.
As previously reported by II, Ludovic Phalippou, the University of Oxford Said Business School professor, and William Magnuson, professor at the Texas A&M University School of Law, have argued that in lieu of securities regulations, private litigation by retail investors is likely to act as a form of enforcement.
The academics suggested that “practices normalized in institutional settings — misleading performance metrics, manipulable valuations, opaque fees, limited liquidity, and fiduciary duty waivers — become significant litigation risks when ordinary investors enter the picture.”
But J.P. Morgan Asset Management’s Michael Cembalest and others are questioning how much of a risk private equity firms are actually facing. If litigation does occur, Cembalest suggested, it’s more likely to be against the financial intermediaries that sell the products, rather than the private equity firms themselves.
One of the areas for possible litigation that Philippou and Magnuson cited is the use of the internal rate of return (IRR) performance measure. “I found this unconvincing,” said Cembalest, chairman of market and investment strategy at JPMAM, in his 2025 alternatives investment review. “First, lack of investor knowledge of finance is not a basis for litigation. Second, as long as IRR is not described as being the same as a compound annual return, the authors’ exaggerated hypotheticals are irrelevant.”
According to Cembalest, lawyers that structure retail alternative asset documents object to several premises of the academic paper. “They emphasize that alternative asset products are usually sold via professional intermediaries with fiduciary duty to clients, and who negotiate selling agreements and build in protections for investors.” As a result, he said, “they believe that challenges to fee structures face very high hurdles and are rarely successful in the presence of binding arms-length contracts between sophisticated parties.”
Jeff Hooke, a former senior lecturer at the Johns Hopkins Carey Business School, agreed that the risk of litigation is low. “Based on my limited experience as an expert witness against PE funds, the PE funds and their distributors have nothing to worry about,” he told Institutional Investor.
Hooke explained that “if a PE fund is sold or distributed to retail in 2025, the investors won’t know the likely investment return until, at best, 2033 or 2034.”
On top of that, the legal process is slow. “If the fund is a turkey, or mismanaged, and the investors find a class action law firm — a necessity since they won’t have enough [money] invested to sue individually — the law firm needs a couple of years to file a claim, get a judge to approve class action status, and do discovery against the PE fund.”
After either a trial or a mediation, which would take another two years, “the PE fund (and the distributors) might settle for 10 cents on the dollar in 2036,” Hooke said.
“Litigation will be a minor cost of doing business,” he concluded.
And according to Cembalest, most funds indemnify managers, so “any litigation proceeds would be paid by the fund rather than the manager, so LPs would be collecting mostly from themselves.”
He argued, however, that the risk to financial intermediaries is not negligible. Citing FINRA arbitration cases, he said claimants have received settlements or awards in at least half of the outcomes. “Such litigation applies to actions taken by the broker-dealer and not actions taken by the alternative asset manager,” he added.
Cembalest suggested that issues related to liquidity could be one cause for litigation against intermediaries. “Many funds have provisions that allow suspension or limitation of redemptions under certain conditions, i.e. during market disruptions or a surge in redemption requests,” he said. “If the fund acts within the explicit terms of the documents and disclosed these possibilities to investors, a lawsuit against the alternative asset manager is unlikely to be successful. But what if these risks were not explained and disclosed clearly in materials the intermediary used with its retail clients? That could be a basis for litigation.”
And if there is a sharp recession and a liquidity crunch, he added, “documentation firewalls designed to legally shield alternative asset fund managers will likely be tested.”
