The rise and rise of private equity zombies

An estimated 1,180 zombie funds are being held in institutional investors’ portfolios, according to the latest research from private equity data specialist Preqin. This is an increase from the 1,049 estimated by Preqin as of a year ago, and a further increase from the 999 in existence as of July 2013. The value of unrealised assets being held by zombie funds has also risen, from $80.9 billion in 2013 to $126.6 billion in 2015.

Christopher Elvin, the company’s head of private equity products, says that Preqin has witnessed an increase in the number of zombie funds within the private equity industry over recent years. “Our latest analysis now includes funds with a 2008 vintage, for which many would have been making investments at the peak before the financial crisis hit,” he says. “As such, these funds are likely to have found it difficult to realise assets for a profit, resulting in an estimated 250 funds becoming zombies.

“Zombie funds are a point of contention within the private equity market. If they are struggling to sell the assets in their portfolio for a profit, firms can sometimes find themselves extending the lifecycle of a fund far beyond what they originally intended. As they continue to take management fees on the assets they hold, managers can come under increased pressure from investors to liquidate the fund.”

A zombie fund is one that still holds some or all of its assets beyond its intended holding period, usually as it is struggling to sell investments for a profit. The manager of a zombie fund will still receive a management fee on the assets held, creating a misalignment of interests with investors.