Preqin’s latest research shows that private equity’s so-called zombie funds are on the rise in investor portfolios. While venture capital funds are still the biggest group of zombie, the number of zombie buyout funds have also increased from 2014.
Zombie funds, which are funds that have retained all or some of their assets beyond the original holding period, are naturally a big problem for investors and fun managers alike. Furthermore, the Preqin study defines funds with a 2003 – 2008 vintage, which has not had a successful fundraising for a follow up as a zombie fund.
Preqin’s research found that private equity zombie funds have reached 1,180 by the end of July. This has been a hefty increase from 1,049 last July. Furthermore, it is an even bigger increase from the 999 zombie funds at the end of July 2013. This shows that zombie funds are rapidly becoming a big problem for investors.
On top of the funds, these funds also have an increasing amount of unrealised assets in hand. In 2013, the unrealised assets in zombie funds stood at $80.9 billion, but they have now increased to $126.6 billion.
As mentioned above, venture capital funds currently have the highest proportion of zombie funds. Over half of all zombie funds are currently venture capital funds. Buyout vehicles account to 21% of all zombie funds and around 10% of funds are growth funds.
Interestingly, North America has the largest proportion of zombie funds. North American funds are closely followed by Europe-focused funds. The respected proportions are 45% for North America and 29% for Europe.
The Financial Crisis Sill Looms in the Shadows
The findings show that private equity funds are still suffering from the consequences of the financial crisis. The increase in zombie funds is mainly down to the inclusion of these 2008 vintage funds. Quite a few private equity firms invested capital right before the financial crisis, with funds still struggling to make an exit from some of these firms.
In fact, when it comes to unrealised assets, it is these 2008 vintage zombie funds that account for the most. From the total $126.6 billion around $42.2 billion worth of assets comes from these funds.
As the funds continue to have managers’ fees withdrawn, but don’t generate much profit, the existence of zombie funds creates underperformance on the industry. The difference in performance can be staggering. Vintage funds in general from 2004 generate a median distribution to paid-in value of 94.4% for private equity. But the 2004 vintage zombie funds only make 37.4%.
Christopher Elvin, the head of private equity products at Preqin, said, “Zombie funds are a point of contention within the private equity market. If they are struggling to sell the assets in their portfolio for a profit, firms can sometimes find themselves extending the life-cycle of a fund far beyond what they originally intended. As they continue to take management fees on the assets they hold, managers can come under increased pressure from investors to liquidate the fund.”