Researcher Preqin estimates that private equity firms are sitting on US$116 billion of assets trapped in zombie funds.
Preqin data shows that there are approximately 1,200 private equity funds which can be classed as ‘zombie’-poor-performing funds past their expected holding period and whose managers have no no plans to raise a successor fund but still rake in fees from investors.
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Preqin said it identified zombie funds by examining active firms managing a fund with a 2001-2006 vintage that have not raised a follow-on fund after 2006.
According to the report, zombie funds were sitting on shares in approximately 1,732 companies, which may prove interesting opportunities for fund managers and other potential acquirers looking to purchase assets at a discounted price.
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% of paid-in capital back to investors, compared to 99% for all private equity funds of a 2003 vintage, Preqin said.
Zombie funds have not had a detrimental impact on investor’s appetite for new investments. 87% of investors interviewed by Preqin in December 2012 said they are planning to maintain or increase their allocation to private equity in the next 12 months.
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By GlobalDataIgnatius Fogarty, head of private equity products at Preqin, said: "No one is a winner when zombie funds are involved and they represent a clear misalignment of interests between the fund manager and investor.
"Consequently, GPs (General Partners) should be eager to realize 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," Fogarty added.
In May, findings of a Preqin report revealed that the average holding period for private equity-backed portfolio companies increased year on year between 2008 and 2012, which has impacted the amount of capital distributed back to investors.
The 2013 Preqin Investor Network Global Alternatives Report, published towards the end of May, demonstrated that investors remain committed to their allocations to private equity, hedge funds, real estate and infrastructure.
Research findings earlier in June by Preqin showed that almost half (42%) of private equity investors have exposure to private debt and this proportion is set to increase as more investors consider committing to private debt in the future.
