Portfolios are Stuck: The Rise of Zombie Funds

Persistently low distributions are starting to reshape the competitive landscape among GPs.

In normal periods, roughly 15% of fund series fail to raise a successor fund; that rate rose to about 20% during the 2008–09 financial crisis, when failure was concentrated among third- and fourth-quartile DPI performers.

Today, distributions as a share of NAV have held below 15% for four consecutive years, a new record, and only about 70% of the fund series expected to re-raise in the current cycle have done so, leaving a meaningful tail exposed if liquidity doesn't improve soon.

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The strain is concentrated among GPs sitting on the oldest, least liquid portfolios. More than 16,000 companies globally have now been held for more than four years, ~52% of total buyout-backed inventory, not only the highest share on record, but also ten percentage points above the five-year average. For funds carrying an aging book, raising a successor fund on the old playbook is becoming far harder.

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Deals in the 2021–22 vintage in particular were underwritten with peak multiples, unusually low base rates, and generous documentation. These deals were "structured for a world that no longer exists," and are now facing extra scrutiny as refinancing markets grow more selective.

Simply put, the market is working through its 2021–22-vintage excesses.

PitchBook's cohort analysis puts numbers to this pattern. Just 16.6% of the 2021 vintage had exited after four years, compared with 32.3% of the 2017 vintage after four years. Extrapolating the current pace, only about 50% of the 2021 vintage would be wound down by year ten.

The timing compounds another problem: fund IRRs tend to decline after year seven of ownership and TVPI tends to flatten after year eight. That means the longer these vintages sit unexited, the more of their return potential is likely already behind them, not ahead.

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GPs themselves confirm where the pressure is concentrated. In PitchBook's inaugural US Private Equity Survey, half of respondents named exiting portfolio companies as their top priority for the next six months, a priority that ranks far ahead of deploying capital, which shows just how much of the industry's attention is now consumed by clearing the backlog rather than adding to it.

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