There are approximately 1,200 private equity funds that can be described as zombie funds, according to Preqin data shown in this month’s Private Equity Spotlight.
In a zombie fund, the GP is sitting on their assets past their expected holding period with no intention of making realisations and no plans to raise a successor fund, while continuing to collect management fees from their investors. Preqin identifies zombie funds by examining active firms managing a fund with a 2001-2006 vintage that have not raised a follow-on fund after 2006.
Zombie funds have a much lower median distribution to paid-in capital compared to their peers, with zombie funds of a 2003 vintage distributing only 39 per cent of paid-in capital back to investors, compared to 99 per cent for all private equity funds of a 2003 vintage.
Secondary buyouts can offer a solution, with a fund manager taking over the assets of a zombie fund and creating an exit opportunity and liquidity to the primary vendor.
Preqin has identified approximately 1,732 portfolio companies held in zombie funds, which may prove interesting opportunities for fund managers and other potential acquirers looking to purchase assets at a discounted price.
Fund managers are seeing opportunities in this space. Vision Capital, for example, is looking to acquire mature portfolios of mid-market European companies; it closed its latest vehicle, Vision Capital Partners VII on EUR680m.
Zombie funds have not had a detrimental impact on investor’s appetite for new investments; 87 per cent of investors interviewed in December 2012 are planning to maintain or increase their allocation to private equity in the next 12 months.
“No one is a winner when zombie funds are involved and represent a clear misalignment of interests between the fund manager and investor,” says Ignatius Fogarty, head of private equity products, Preqin. “Consequently, GPs should be eager to realise investments and return capital to investors so that there is no reputational damage that adversely affects their ability to raise a follow-on fund. The secondary buyout market goes some way in offering a solution to return capital to investors.”
