Zombie funds
LPs expect more living dead funds to emerge in their private equity portfolios, and most are taking a pragmatic approach to managing the situation.
Private equity’s longer holding periods, plus the elevated entry valuations that some firms paid before interest rates rose, appear to be coming home to roost in investor portfolios. Over half (54%) of respondents expect the number of zombie funds (where a GP is prolonging a fund’s life in order to maximise management fees) in their own portfolios to increase in the next two years. Nearly a third (31%) expect the number to remain stable, while 15% anticipate a decrease.
This builds on a previous finding from our summer 2024 Barometer, when 48% said they already had zombie funds in their portfolio and 28% expected them to appear later in the cycle.
LPs have a range of options for dealing with zombie funds, and our survey points to investors being largely pragmatic and supportive under these circumstances. The preferred course of action is stepping down the management fee. Manager incentive resets (whereby a fund’s economic terms are changed to encourage timely exits) comes in a distant second (18%) while just 11% of LPs prefer to leave zombie funds to play out.
However, our survey suggests that North American LPs are somewhat more likely than others to take a proactive stance: 14% prefer manager removal (vs. 11% overall) and 11% indicated they would refuse to extend a fund’s life (vs. 6% overall).
