📉 Zombie Fund: The Fund That Never Dies

Hi there,

This edition looks at zombie funds, vehicles that remain active long after their anticipated lifecycle, holding illiquid assets and generating shrinking distributions that gradually erode fund performance.

We cover the origins of the term post-GFC, the market conditions that transform ordinary funds into zombies, and why the growing backlog can be concerning for investors and managers.

Let’s dive in.

Note: Acronyms used throughout this article appear at the end of the post for reference.

👔 Background: The Fund That Never Dies

Imagine a European buyout fund launched in 2008, still active in 2025 after several extensions. It has five companies left: two over-levered, one underperforming with exit pushed by a few years, another damaged by COVID, and a final asset that appears solid on paper but attracts no credible buyers.

The fund now marks its value below cost yet continues to charge fees. At the same time, investors still question the (low) valuations, struggle to sell their interests except at discounts, and have little appetite to back the GP again. This is the practical meaning of a “zombie fund”.

Bain’s recent private equity study indicates the industry is holding tens of thousands of unsold sponsor-backed companies worth trillions of dollars, while distributions to LPs have reached their lowest share of NAV since the GFC.

For CIOs and investment professionals, zombie funds highlight two interlinked challenges: a restricted exit environment and reduced LP liquidity as distributions keep on getting delayed.

📈 Origins and History of “Zombie Funds”

While it’s difficult to pinpoint the precise emergence of zombie funds, by 2014 multiple industry sources were already raising alarms. Many ten-year funds faced a sluggish post-GFC recovery and a weak IPO market, which left managers holding illiquid assets well past their intended life.

There is no single canonical definition for zombie funds. Preqin’s early framing described them as private equity vehicles that had reached or exceeded their term, held significant unrealized assets and were managed by GPs unable to raise successor funds.

CAIA and INSEAD’s work emphasized two key features: aged funds with weak DPI relative to TVPI, and sponsors effectively shut out of fundraising and reliant on management fees from small pools of residual NAV.

ILPA highlighted repeated extensions with limited exit progress, low DPI relative to peers, GPs failing to raise follow-on funds and continuation vehicles primarily used to warehouse underperformers.

Taken together, working characteristics are reasonably clear:

– Fund age: typically more than 12–15 years from vintage, including extensions.
– Distributions: weak DPI relative to TVPI and peers; distributions largely stalled.
– Performance: underperformance versus PME, with TVPI heavily dependent on marks rather than cash.

Note: It’s also useful to distinguish among the zombie fund (the fund itself), the zombie GP (a franchise subsisting on legacy fees), and the zombie company (an asset unable to grow or refinance but retained to avoid crystallizing losses).

💡 The Backlog and the Liquidity Squeeze

Bain’s 2025 private equity report estimates buyout funds are holding about 29,000 unsold companies worth roughly $3.6 trillion of unrealized value, even after a modest exit rebound in 2024.

The implications are structural: a significant portion of this value resides in funds already well past their planned harvesting window, originally underwritten for a shorter path to exit.

When exits don’t go as planned, extensions follow. Fee bases persist on shrinking NAV, while cash returned to LPs slows. Current data indicate LPs receive distributions of only 10–15% of NAV, well below the 20–30% industry historic average.

Meanwhile, commitments from recent vintages continue to be drawn, leaving many programs cash-flow negative at precisely the point they would normally be recycling capital.

Higher rates and a stronger equity market add more pressure. Many LPs now find themselves overallocated to private equity, prompting them to conserve cash and prioritize existing commitments rather than deploy into new strategies.

In that environment, buyers clear trades only at unattractive prices, so GPs often defer exits and focus on managing marks instead of crystallizing losses into weak demand. As a result, the tail of older funds keeps getting longer.

Zombie funds are therefore the predictable outcome of this cycle. With exits blocked and buyer liquidity constrained, these vehicles remain in repeated extensions, supported by residual NAV and ongoing fees, while assets drift ever further past their planned holding periods.

📉 Economic and Portfolio Impact

Zombie funds carry tangible economic costs. Consider a $1 billion fund that has returned $800 million and carries $200 million of NAV after year ten, with a 1.5% fee on NAV during extensions.

If the vehicle runs another five years and NAV declines roughly linearly to zero, the average fee base is about $100 million, implying roughly $7.5 million of incremental fees on the tail portfolio. Where marks prove optimistic relative to ultimate exit values, that drag on inflated NAV is pure leakage to LPs.

Extended holding periods and delayed exits compress IRRs even if TVPI is preserved, disrupt liquidity planning, push programs into overallocation and force hard choices on re-ups vs. new strategies.

For public plans, it is increasingly hard to justify decade‑old funds with opaque assets, limited distributions, and ongoing fees in board materials, which in turn raises scrutiny on CIOs and staff and accelerates the push to redeem, sell stakes, or shut these vehicles down.

For GPs, these vehicles become a drag on the platform. Senior teams are pulled into managing old, low‑upside assets instead of building new business, and weak legacy vintages weigh on the firm’s track record and shape consultant views. Over time, a cluster of such funds turns into a structural headwind for the franchise, absorbing attention and fees without offering a credible path to realizations.

🔎 Broader Market and Strategic Implications

From a macro perspective, the proliferation of zombie funds signals a breakdown in the capital recycling mechanism that underpins private markets. When billions are trapped in non-productive vehicles, the industry suffers a decline in capital velocity. This is an allocative inefficiency: capital sits in legacy positions instead of moving to areas with stronger growth and returns

Furthermore, this overhang distorts price discovery across the wider M&A landscape. Zombie assets are often held at marks that do not reflect clearing prices, creating a persistent bid-ask spread that freezes deal flow.

Until valuations reset to market-clearing levels — via forced sales, sharper write-downs, or secondary trades at steeper discounts — the gap between private marks and public comparables remains a structural risk. That mismatch will keep drawing scrutiny from regulators and investment committees.

Ultimately, these pressures accelerate industry bifurcation. The period when strong markets lifted most managers is fading. Capital is concentrating with platforms that can realize assets and keep raising new capital, while weaker groups are left managing legacy portfolios in long run-off.

This trend naturally limits the number of GP relationships LPs can sustain, driving market consolidation in which weaker groups simply wind down rather than recover.

🔎 Closing Thoughts

Zombie funds are a recurring by-product of long-duration, illiquid capital in a weak exit cycle. Their size and persistence will directly influence fundraising conditions over the next few years.

If exits remain uneven, LPs will favor managers with clean realization histories, tight end-of-life discipline, and a record of using GP-led tools to deliver liquidity, not delay it. Platforms with large ageing tails and little progress will face tougher questions at re-up.

Secondaries have become core market infrastructure. Used well, they shorten tails and reset governance. Used poorly, they roll old problems into new vehicles with extra fees and carry. LP underwriting will increasingly focus on which of those two patterns a manager follows.

On terms and oversight, several refinements are under active discussion: clearer fee step-downs linked to fund age and residual NAV, stricter limits on extensions, more engaged LPACs, and fuller reporting on tail outcomes. That direction would naturally put more emphasis on time-to-liquidity and on managers’ realized experience with ageing portfolios, beyond what is written in headline terms.

That’s the newsletter for today!

As always, feel free to share feedback or suggestions on future topics you’d like covered.

Until next time,
PE Bro

P.S. Was this forwarded to you? Subscribe here.

Below is a list of acronyms used in this post:

GFC = Global Financial Crisis | GP = General Partner | LP = Limited Partner | CIO = Chief Investment Officer | ILPA = Institutional Limited Partners Association | DPI = Distributions to Paid-In (ratio) | TVPI = Total Value to Paid-In (ratio) | PME = Public Market Equivalent | NAV = Net Asset Value | LPAC = Limited Partner Advisory Committee | GP-led = General Partner-led secondary transaction

Disclaimer: This publication is for general informational purposes only. All views expressed are the author’s own, based on publicly available information believed to be reliable at the time of writing. No statement should be interpreted as fact, investment advice, or a specific claim about any individual, company, or security. References to persons or entities are for illustrative or historical context and do not imply wrongdoing, endorsement, or criticism. While efforts are made to ensure accuracy, errors or omissions may occur. The author and publisher accept no liability for any loss or damages arising from reliance on this material. Readers are encouraged to verify information independently before drawing conclusions or making decisions.