NEW YORK: Private equity fund investors expect more so-called zombie funds to show up in their portfolios as dealmaking remains muted, according to a survey from secondaries firm Coller Capital.
More than half of investors said they expect the number of zombie funds, where a money manager prolongs a fund’s life beyond its expiration date to maximise management fees, to proliferate in the next two years, the survey found.
That’s up from 2024, when 28% of fund investors anticipated an uptick.
“That’s higher than I would have anticipated,” said Eric Foran, a partner at Coller, which surveyed 108 private capital investors worldwide that collectively oversee about US$2 trillion of assets.
While some zombie funds have always lurked in the private equity ecosystem, the number has likely grown because of the difficulty selling assets that were bought at elevated prices during private equity’s heyday when interest rates were near zero.
The private equity industry has slumped broadly since the US Federal Reserve began raising interest rates in 2022.
Higher rates have slowed dealmaking, in turn squeezing cash distributions to fund investors and making it more difficult for private equity firms to raise new funds.
So far, 2026 has disappointed those hoping for a deal comeback. Market uncertainty has stymied buyouts, as have fears that rapid advancements in artificial intelligence will disrupt private software firms.
Global deal count has decreased in the first half of the year, according to a private equity midyear report from Bain & Co.
“A growing number of companies are essentially trapped in portfolios,” Bain said in its report.
When money managers sustain funds indefinitely, it creates a conundrum for clients, who either have to press for exits, sit tight or take action against the firm.
Most investors prefer a non-confrontational approach, such as asking for a reduction in management fees, according to the Coller survey.
Others would prefer that a fund’s economic terms be revised to encourage managers to exit investments.
Continuation vehicles, where existing holdings are rolled into new funds that raise fresh cash, provide one way for money managers to avoid saddling their existing investors with aging assets.
Two-fifths of fund investors anticipate continuation vehicles to increase, even when traditional exits ramp up again, according to the survey. — Bloomberg
