Apparently it is not just World War Z where ferocious zombies suck the blood out of innocent bystanders—I don’t know the plot, so I am just guessing based on how all these vampire, zombie and werewolf invasions play out. The asset management industry also has a unique strain of zombie funds which have entrapped billions of dollars in their tight grips and have no plans to expand, raise more money or churn out decent returns.
Preqin’s research estimates that there are about 1200 private equity funds that have stayed dormant over the last 7 or so years. Preqin defines a zombie fund as a set up where the general partner is sitting on shares in over 1700 companies, makes no realizations and does not raise any new funds. Preqin’s Jessica Duong wrote, “When there are no portfolio realizations, the dead will walk among us.” Their research estimates that $116 billion in assets is trapped under such private equity funds who keep on charging management fees and where capital is held beyond the holding period.
The alternative investment research firm found that typically a zombie fund has not returned cash to its investors according to industry’s standard. The survey analyzed funds managed with a 2001-2006 vintage, and found that while a ‘living’ private equity fund with a 2003 vintage had distributed 99 percent of paid-in capital to investors, the ‘living-dead’ funds had only distributed back 39 percent of capital.
While the absence of realizations and profits from these funds poses a regulatory challenge, there is also an opportunity here for those who are looking to buy portfolios at discounted prices. Secondary buyouts is one solution that helps in the cleanup of such entities. Vision Capital, a London based fund, is in the business of buying mature portfolios and has recently closed a fund at $1.06 billion and is in the process of raising another. Reuters reports that Kirchner Group and Crestline Investors joined hands last month for a joint venture that was looking to buy portfolios of zombie funds.
Situation Of Zombie Funds is Dire
Preqin’s research also noted that while the situation created by zombie funds is dire, investor interest in putting more money in PE funds remains unshaken. In its December 2012 survey, 87 percent of investors said that they will hold or increase their investments in private equity funds in the coming year.
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