The Rise of Zombie Funds in Private Equity: A Concern for Investors
Private equity investors are increasingly facing the challenge of “zombie funds” that are tying up their capital, as revealed by a survey conducted by Coller Capital, a leading secondaries asset manager.
The Zombie Fund Dilemma
According to the survey, almost 50% of pension funds, insurers, and other investors currently have investments in funds with limited prospects of liquidation or establishing a successor vehicle. Additionally, 28% anticipate the emergence of such zombie funds in their portfolios.
Factors such as inflation and high-interest rates in recent years have negatively impacted the growth potential of portfolio companies, potentially leading to a surge in zombie funds, as noted in the report.
The Current Private Equity Landscape
Coller Capital surveyed 110 private equity investors, known as limited partners, across North America, Europe, and Asia. The firm, managing $33 billion, is a significant player in the secondary market, facilitating investors to exit their private equity positions before fund closure.
As private equity faces challenges amid rising interest rates, buyers and sellers are finding it difficult to secure favorable exit prices. Additionally, financing costs for portfolio companies have escalated, adding to the complexities in the industry.
The Future of Private Equity
According to Coller, 64% of surveyed limited partners anticipate mergers or acquisitions involving private equity managers they are currently invested in within the next two years. This trend points to potential consolidation in the industry.
However, concerns persist among investors, with 57% expressing discomfort with the use of Net Asset Value (NAV) finance in private equity. The rising trend of leveraging portfolio company assets through NAV financing has raised apprehensions about impacting returns in the long run.
Remaining Cautious in Private Equity Investments
As private equity continues to navigate challenges, investors are advised to stay informed about the implications of zombie funds and the use of NAV financing. Making informed decisions and staying abreast of industry trends can help investors mitigate risks and optimize their investment strategies.
For further insights on the prevalence of zombie funds and the implications of growing private equity debt, feel free to explore more here.