There are currently over a thousand zombie funds – funds more than 10 years old which still have assets remaining in their portfolios where the manager hasn’t raised a subsequent fund – according to PEI’s Research and Analytics division.
The 1,001 funds were raised by general partners before 2005 and represent $393.1 billion in capital. Funds incorporating buyout strategies in their focus accounted for the bulk of these funds at $201.4 billion in raised capital.
By region, the majority of the funds focus on North America at 46 percent, followed by Western Europe and globally-focused funds at 18 percent each.
“You’ve got a pretty big slice of the industry that is time-expired,” said the head of one London-based private equity firm that focuses on acquiring tail-end fund interests. “What it’s really saying is that private equity managers find it challenging to realise assets within a fund within the originally envisaged 10 year time span, so these funds tend to extend well beyond that original 10 year period. If you’re a long-standing institutional investor in the asset class, you end up with lots of bits and pieces of these mature private equity funds at the bottom of your portfolio.”
The key to making returns from buying tail-end fund stakes is pricing, as well as having insight into the underlying companies, the source said.
“Reporting to net asset value is not an exact science, it’s a judgmental valuation. Acquiring assets at a discount or benefiting from the premium to net asset value at which those assets might be realised are the keys to making returns.”