The zombie fund problem is getting worse

The private equity industry faces a growing issue known as "zombification," where firms become operational but lack a clear path to exit and achieve target returns. According to a new study by PitchBook, 40% of PE-backed companies in the US, with a net asset value exceeding $860 billion, have been held for more than seven years.

This is the third consecutive year of increase and the highest level since 2016, when the exit market dealt with a glut of companies affected by the Great Financial Crisis. Analysts believe the traditional three-to-five-year hold period for private equity investments is no longer a hard rule.

The problem is particularly severe for PE funds investing between 2018 and 2022, a time marked by low borrowing costs and fiscal stimulus, leading to overvalued acquisitions. Funds that started investing in 2021 have returned only 0.14x investors' initial commitments, which is significantly lower compared to earlier vintages at the same stage of their investment lives.

Moreover, more than half of the 6,437 US PE-backed companies held for over five years have not completed any deal since the end of 2021, resulting in weak distributions to investors and growing concerns about mark-to-market credibility.