The fastest growing corner of private equity isn’t secondaries, evergreens or continuation funds. It’s zombie funds.
So-called zombie funds are those that are more than ten years old, have stopped making new investments and still hold portfolio companies they haven’t been able to sell without recognizing losses or sacrificing incentive fees. Meanwhile, GPs may continue collecting management fees on a net asset value that may be inflated.
Today zombie funds account for about $1.2 trillion, or 12 percent, of global private equity assets under management, according to Treo Asset Management, which calls zombies “tail end” funds.
“It's a softer way of saying it,” says Finbarr O’Connor, the founding partner of Treo, which focuses solely on managing these assets for both limited partners and general partners. Treo based its analysis on 2026 data from Preqin, PitchBook, and Jefferies Global Secondary Market Review.
“That number has grown 38 percent year over year and has nearly tripled since 2019,” he says. The private equity industry’s massive fundraising between 2018 and 2020 and the subsequent dearth of exits has left a mountain of portfolio companies unsold. Treo expects the value of zombies to grow to $2 trillion in the next few years as those fund vintages age.
Investors in private equity expect the number of zombie funds to continue growing, according to a recent survey by Coller Capital, a secondary private equity firm.
Over half of the respondents to Coller’s survey expect the number of zombie funds — where they say a GP is prolonging a fund’s life in order to maximize management fees — in their own portfolios to increase in the next two years.
Coller attributed the trend to longer holding periods, and the elevated valuations firms paid before interest rates rose, which it said are now “coming home to roost in investor portfolios.”
The average age of the zombie funds tracked by Treo is 14 years. Both large and small private equity firms have zombie funds, which may hold only a few remaining portfolio companies. Sometimes these companies are caught up in regulatory issues or litigation that makes selling them problematic, according to O’Connor.
The rise of zombies raises an issue that allocators didn’t anticipate when they poured money into private equity after the market crash of 2008.
“Your money can get trapped,” says Dan Rasmussen, founder of hedge fund Verdad Advisors and a private equity critic. “I think people didn't really think about that when they put huge percentages of their money into it.”
In theory, managers could just liquidate the old funds. But that would often mean forgoing management fees — and O’Connor says that most are unwilling to do that. He said there are some cases where the GPs continue to collect management fees while a company is in liquidation, which infuriates the LPs.
But keeping the funds alive carries its own risks. Sponsors that can’t return capital may struggle to convince investors to commit to their next fund. Of the 2,314 managers that raised a fund in 2015—11 years ago—548 did not raise a subsequent fund, and 389 raised only one additional fund, according to data from Preqin and PitchBook. That comes to 40 percent of 2015 vintage managers.
Finding a way out of these aging funds has become a growing business for Treo, even though the options are limited. O’Connor says secondary funds typically only buy stakes in funds that are six or seven years old, and, at any rate, there isn’t enough capacity in the secondaries market to buy stakes in all zombie funds. The same limited capacity goes for GP-led secondaries, also called continuation funds. And only the top 10 percent of the companies inside older funds are strong enough to qualify for continuation funds, he says.
“The deals that tend to get done in CVs are the blue-chip, top tier assets. The bottom 90 percent, they’re struggling,” he told Institutional Investor.
For the lowest performing funds, “TVPI doesn't get any better after about year seven or eight. And in fact, it declines,” says O’Connor. TVPI refers to the total value of a fund’s distributions and remaining value relative to the capital investors have paid in.
Valuations peaked in 2021, and the high interest rate environment that followed has made it difficult for private equity funds to sell the companies they own, as Institutional Investor previously reported. That year, global private equity activity peaked in both the dollar value and the number of deals, according to PitchBook.
“Nobody expected it would last this long, and it may even last longer,” O’Connor says.
“GPs have been reluctant to shed below peak NAV [net asset value] because they've gotten accustomed to the marks that they saw four years ago,” he explains. And they look at that and go, ‘well, that's what I want. I want to get back there.’ But depending on what sector you're in, particularly tech, some of those valuations may not come around for a while again.”
Others say that the private equity funds simply overpaid for companies during the good times. “The big picture story is that eight to 12 years ago, people were paying up for these deals,” says Jeffrey Hooke, senior finance lecturer at Johns Hopkins Carey Business School who has testified for plaintiffs in lawsuits against private equity firms and private credit funds. Hooke, who previously worked in private equity, says the companies were bought at historically high multiples to EBITDA. For smaller deals, such as roll ups and middle market companies, they paid even higher multiples, and that’s what’s left in a lot of these funds. “It's hard to unload them at the multiples at which they bought,” he says.
“I think a lot of the GPs are just holding on, praying that interest rates drop, that they can do more continuation vehicles, or that they can flip these to other PE firms,” he adds. “It’s just not happening at a rapid pace. I don't know what they're going to do.”
Rasmussen adds that many of these portfolio companies, even if they are good businesses, are too small to IPO “and so there’s no exit path there.” The IPO market has remained difficult for anything that isn’t tech- or AI-related. And these old funds often hold LBOs—the kind of heavily indebted companies that are not popular in today’s markets.
That means they have to sell to strategic buyers or other private equity sponsors. “And if you paid too high of a price — which they did — and the overvaluation in those periods was very, very high and the debt levels were very, very high, you're in real trouble and you're not going to be able to exit this stuff,” Rasmussen says.
It's likely to get worse before it gets better. The illiquidity in today’s market has created what O’Connor calls the “mammal inside the snake” for funds 10 to 12 years old. “Eight-year funds became year nine and year nine became year 10 and so on and so forth,” he explains. “There’s a large amount of AUM in those vintages that have to get digested.”
The average age of a private equity fund is now over 14 years old, and the percentage of companies held more than seven years has risen from a decade low of 14 percent to nearly 20 percent. That could “hinder managers to achieve exits at desired valuations as the supply of those seeking an exit grows,” according to Treo.
In 2024, Hooke did a study based on 2023 Preqin data that found that for funds with vintages between 2015 and 2017, half of the total value of paid in capital in the funds consisted of unsold deals.
“A lot of these 10-year-old funds still got 30, 40, 50 percent of the stuff just sitting up there on a shelf waiting to be sold,” he told II at the time.
Given this huge backlog, a few institutions with heavy commitments to private equity may have as much as 25 percent of their private equity portfolios in funds that are zombies, according to several private equity experts.
One allocator at a state pension fund told II that it, too, has zombie funds. “We have a bunch, and they're like, $300,000, $100,000 — tiny exposures. We keep them in a bucket called winding down.”
Although small exposures, he calls them “operational headaches.”
According to the Coller survey, investors’ preferred way of dealing with zombie funds is to negotiate lower management fees. Only 18 percent suggested manager incentive resets, and only 11 percent prefer “to leave zombie funds to play out.”
Helping manage these assets is what Treo has been doing for the past 15 years. “You could think of us like an OCIO for tail-end troubles,” says O’Connor.
“If you've got a lower performing commingled fund, you as an LP may want to start thinking about your options rather than holding onto the money and it truly becomes dead money,” he says. O’Connor says it is preferable to “recycle” out of funds in year seven or eight and put that money back into a top performing fund.
When Treo opened its business 15 years ago, investors paid little attention to what happens at the end of a private equity fund’s life, says O’Connor, adding that they ignored end of life issues such as liquidation and liquidator fees.
Now LPs should be thinking about a “pre-nup” type of planning, he says. “I wouldn't say the LP universe is quite an activist universe, but they're more open to consider options.”
He also says that sometimes LPs can work with the GP “to create a reset of fees. It may be enough to get them incentivized to do what needs doing to create liquidity.” For example, they might suggest putting a portfolio company into a continuation fund, and agree to a lower hurdle rate so the GP is more likely to earn an incentive fee if a company is sold.The inability to earn an incentive fee is holding back a lot of GPs from exiting old companies, according to O’Connor.
LPs might also be able to replace GPs in problematic situations, including succession concerns or when GPs lack resources to manage the zombie assets. In those cases Treo is hired to manage the assets. Or it can set up separately managed accounts or partnerships to manage these portfolios for institutions like state plans and sovereign wealth funds.
A problem often occurs with continuation vehicles, which have brought new money in and, after three or four years, still haven’t sold the assets. At that point, there are “all sorts of issues around the GP and credibility of the NAV,” says O’Connor. “It'll probably lead to friction along the way as we see more of these CVs not realizing the targets that were set when they got established.”
Hooke says the rational approach by GPs would be to sell the portfolio companies at less than their stated value “and just basically tell your investors. ‘Yeah, we were overvaluing them the last five years. Sorry about that.”
“What are the LPs going to do? Are they going to sue them for giving them lousy valuations?” he asks. Hooke said he didn’t think so. “They don't want to admit mistakes.”
The investors aren’t blameless either, he suggests. “There's no real due diligence,” he argues, noting that LPs don’t always send in a team of accountants and valuation experts before investing in a fund. “They're pledging 10 years of very high fees, and they don't spend a half a million up front to see if the numbers are accurate.”
