Private Equity Faces Surge in Zombie Firms
Private equity is entering a challenging era marked by a surge in so-called “zombie firms.” These firms, struggling to raise capital and maintain profitable portfolios, reflect a significant shift in the investment landscape.
Decline of Established Private Equity Firms
Vestar Capital, a New York-based firm, exemplifies this trend. In 2022, Vestar informed its partners that it would not launch a new fund. Instead, it would focus on improving its existing portfolio, which includes brands like Dr. Praeger’s and Titan.
Vestar’s latest fund, Vestar Capital Partners VII, launched in 2018, has generated disappointing returns. Its internal rate of return (IRR) of 7.7% lags behind the S&P’s average return of 14% over the same period. Over the past 15 years, Vestar’s assets under management plummeted from $7 billion to $3.3 billion, raising questions about its future sustainability.
The Zombie Firm Phenomenon
This situation is not unique to Vestar. Many private equity firms in North America and Europe are experiencing similar issues. According to Bain & Company, over 18,000 private capital funds are active, collectively seeking $3.3 trillion, but the actual amount raised is projected to be only a third of that total.
Statistics reveal troubling trends:
- In 2025, 1,191 buyout funds raised $661 billion, down from 2,679 funds that raised $807 billion in 2021.
- Funds are spending more time fundraising—23 months in 2025, compared to 16 months in 2021.
At the same time, top-tier firms continue to attract investment. For instance, Thoma Bravo and Blackstone raised $24.3 billion and $21.7 billion, respectively, showcasing the stark divide between successful funds and struggling ones.
Challenges of the Current Environment
The broader market conditions present existential challenges for many mid-level private equity firms. Sunaina Sinha Haldea, a private capital advisory leader at Raymond James, warns of the risks faced by those firms unable to secure funding. Without existing investors’ support, new capital becomes increasingly elusive.
Furthermore, performance metrics are declining. The Cambridge Associates U.S. Private Equity Index reports three-year annualized returns of only 7.4%, which is significantly below previous benchmarks.
Management Fees and Fundraising
Despite the performance downturn, management fees continue to provide financial stability for some firms. While total management revenue for Onex Partners has decreased from $146 million in 2019 to $81 million in 2024, these fees remain a crucial revenue stream.
Historical Context
Private equity’s current issues are compounded by a history of soaring asset values. Many firms overpaid for acquisitions when credit conditions were liberal. Now, the average holding period for buyout deals has risen to 6.3 years, indicating a shift toward holding onto assets longer due to stagnant market conditions.
Continuation Funds and Co-Investment Opportunities
As firms struggle, innovative solutions are emerging. Continuation funds allow firms to provide liquidity to investors while retaining certain investments. Crestview Partners recently closed a $600 million continuation fund, highlighting this trend.
Co-investment opportunities are another strategy firms utilize. This allows limited partners to invest directly in portfolio companies, lessening the financial burden on general partners.
Looking Ahead
The future for many private equity firms remains uncertain. The increase in zombie firms signals a sector in transition, with pressures from investors for higher performance standard. While some firms may adapt, others could find themselves unable to navigate the prevailing challenges.
The landscape of private equity is evolving. With numerous firms in jeopardy, the need for effective strategies and better capital management has never been more essential.
