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E-MailKobi Kastiel is a Professor of Law at Tel Aviv University, and Yaron Nili is a Professor of Law at Duke University School of Law. This post is based on their recent article, forthcoming in the Vanderbilt Law Review.
Private equity sits at the heart of global finance. This $13 trillion industry thrives on contracts that lock in billions of dollars over decades, and on relationships between investors—the limited partners (“LPs”)—and the general partners (“GPs”) who manage their money. In an arena where LPs hand over vast sums, have limited say during a fund’s life, and have few exit options, one would expect courts to play a central role in policing the relationship. Yet they do not. In stark contrast to public markets, where shareholder litigation helps deter misconduct and shape corporate norms, private equity operates in a near-litigation-free zone. Lawsuits against GPs are rare, and when they happen, they are reserved for the most egregious breaches, such as outright fraud.
This presents a genuine puzzle. In an industry where fiduciary conflicts and misaligned incentives are not uncommon, why do LPs almost never turn to the courts to enforce their rights? And if litigation is largely off the table, how does the industry resolve disputes and discipline misconduct?
In a new Article, forthcoming in the Vanderbilt Law Review, we offer the first account of the rarity of litigation in private equity, of its underlying causes, and of the ecosystem of extralegal relations and informal norms that serves as a partial substitute for formal legal channels. Drawing on a proprietary dataset of limited partnership agreements (“LPAs”), a comprehensive search of four decades of state and federal litigation, and a unique set of interviews with senior investment officers and legal advisors to both LPs and GPs, we make three contributions to the literature on private equity.
First, we provide an empirical account of the nonlitigious private equity landscape and its underlying causes. Our review of all lawsuits filed over the past forty years against the top- and bottom-fifty firms on Private Equity International’s ranking yielded 153 cases. The overwhelming majority—ninety-six percent—were brought by third parties rather than by investors in the funds. Only six lawsuits (four percent) were filed by fund investors, and only three (two percent) by institutional investors. The pattern holds across both large and small sponsors. Our interviews confirmed the picture: litigation is a last resort, reserved for cases approaching fraud or self-dealing, and most disputes never come close to a courtroom.
What explains this? We show that opting out of court is the product of a carefully structured system. LPAs contain a host of provisions that discourage legal challenges—sweeping indemnification and safe-harbor protections for GPs, mandatory arbitration clauses, and limited information rights for LPs—and we document how these terms have grown increasingly GP-favorable in recent years, as the industry has expanded. But contractual barriers do not tell the whole story. Institutional constraints matter too: Private equity investments are dominated by institutional and accredited investors, who often have little incentive to pursue litigation against GPs. Litigation not only entails high monetary costs but also demands significant time and resources, thereby distracting LPs and preventing them from focusing on managing their investments. Litigation could also expose asset managers to legal risk if the litigation reveals their insufficient diligence or failure to ask critical questions. Finally, and most importantly, LPs also have strong incentives to maintain a positive reputation and preserve their relationships with successful GPs in order to secure future investment opportunities. No LP wants to be branded a “troublemaker” and risk losing access to future allocations from top-performing GPs.
Second, we investigate how private equity resolves disputes without recourse to courts. The absence of litigation does not mean an absence of enforcement. Instead, the industry relies on a web of extralegal and alternative mechanisms: direct, quiet private settlements between large LPs and GPs; collaboration among large investors through Limited Partner Advisory Committees (“LPACs”) and industry organizations such as the ILPA; and public enforcement by the SEC, which can be triggered when LPs report concerns to regulators. Additionally, and most importantly, GPs depend on LPs for future fundraising, and LPs depend on GPs for access to returns. This mutual dependence generates a system in which informal norms and reputational incentives replace (to some extent) formal legal accountability.
However, the reputation market in private equity has important limitations. Unlike public companies, private equity firms are not subject to mandatory disclosure requirements, creating significant information asymmetries. Moreover, because private equity investments are illiquid and long-term, investors may need years to accumulate sufficient information to assess a sponsor’s performance. Indeed, empirical studies further suggest that LPs face difficulties evaluating prior fund performance because underperforming sponsors often inflate reported returns during fundraising. In addition, the argument that reputation disciplines GPs assumes vigorous competition among private equity firms for investor capital. This assumption overlooks the reality that LPs often compete for access to the most sought-after funds. Recent empirical evidence indicates that many investors struggle to gain entry into top-tier alternative investment vehicles, and that even GPs involved in misconduct can continue to attract substantial capital.
Third, we assess the implications of this nonlitigious environment. On its face, the fact that substantial, continuous investment flows into private equity despite the near-total absence of private litigation rebuts the conventional presumption that litigation is a precondition for attracting capital. But we are reluctant to jump to the conclusion that opting out of courts is necessarily optimal. The rarity of private litigation could also stem from less desirable reasons. Internal agency problems can lead the professionals who manage LPs’ capital to avoid suits that might expose their own shortcomings or jeopardize relationships with potential future employers at the GP. The lack of litigation generates market-wide externalities, mainly the absence of judicial norm-setting that would otherwise clarify fiduciary duties and refine disclosure standards, and frictions in the flow of information that hamper both legal and reputational enforcement. Growing concentration among the largest GPs sharpens the asymmetry of power, making reputational threats by any single LP less credible and bargaining over LPA terms more difficult. And the informal system that works tolerably well for large, sophisticated LPs tends to leave smaller investors—those with the least bargaining power and access to information—with the least meaningful recourse.
These tensions are no longer hypothetical. In December 2025, the Abu Dhabi Investment Council, one of the world’s largest sovereign wealth funds, brought a rare investor suit in the Delaware Court of Chancery against a U.S. private equity firm over a continuation-fund transaction. The dispute illustrates both the exceptional conditions under which litigation becomes viable—here, a large foreign investor with the bargaining power and willingness to bear the reputational cost of suing—and the growing strain on the extralegal mechanisms that ordinarily keep such conflicts out of court.
Looking forward, our analysis points to several priorities. Public enforcement, though an imperfect substitute for private litigation, plays an indispensable role, which makes the resources of the SEC—and the durability of rules such as the now-vacated Private Fund Rules—a matter of real consequence. Reputational forces would operate more effectively if LPs had more organized channels for sharing information and coordinating sanctions. And as policymakers weigh opening private markets to retail investors, including through proposals to allow 401(k) plans to invest in private equity, the unique features of this sector—above all, the scarcity of any litigation backstop—deserve careful attention. The same dynamics, we suggest, extend beyond buyout funds to venture capital and hedge funds with similar structures.
Private equity shows that a multi-trillion-dollar market can function almost entirely outside the courts. By highlighting the rarity of litigation in private equity, and by exposing the stark contrast between the role of litigation in private equity and in public firms, we do not intend to make any normative claim about the desirable level of litigation in private equity. Rather, our goal is to shed light on this sharp dichotomy and to open a conversation about a governance model built on reputation—what it accomplishes, where it falls short, and who is left unprotected when the courthouse doors stay closed.
The full Article is available here.
