Key Takeaways

  • According to Coller data cited by Ramsower, 54% of institutional limited partners expect the count of zombie funds in their portfolios to rise over the next two years, up from 28% two years ago.
  • Buyout vintages from 2018 to 2022 face structural exit barriers because sponsors deployed record sums at peak valuation multiples under zero-rate debt terms that buyers will not replicate today.
  • Continuation vehicles lack the aggregate balance sheet capacity to absorb the industry backlog of aging assets, serving only select portfolio companies while leaving parent funds stranded.
  • GP compensation incentives stall liquidity because managers collect baseline fees on cost bases or static net asset values while sitting far below their carried interest hurdles.

The Exit Math for 2018 to 2022 Vintages Is Broken

Private equity spent five years underwriting deals into an economic environment that no longer exists. Between 2018 and 2022, general partners committed trillions of dollars into assets priced at peak earnings multiples, financing those purchases with cheap floating debt. When borrowing costs rose and public comps compressed, the standard exit pathways shut down.

Ramsower points to this mathematical reality directly: “The 2018 to 2022 vintages deployed capital in a low-rate, high-multiple environment. They were not able to exit those deals in time, and that environment no longer exists. The math doesn't work on exits.”

Sponsors cannot sell to strategic buyers or peers without writing down asset marks and crystallizing losses. As holding periods stretch past normal six-year cycles, fund return profiles decay. Dry powder inside those vintage years is gone, meaning sponsors cannot invest new capital to average down entry valuations or reposition underperforming companies. The assets remain stranded on balance sheets.

Continuation Vehicles Are a Patch, Not a Cure

Many sponsors pitch continuation vehicles as the default solution to liquidity constraints. By rolling a trophy company into a new vehicle backed by secondary buyers, the GP delivers a synthetic exit to selling LPs and secures more time to run the business. Ramsower stresses that this mechanism cannot address the sheer scale of unliquidated assets across the private markets.

“A CV can help an individual asset. It might help a single GP avoid being a zombie,” Ramsower observes. “There's far more stranded assets than there is capital for CVs. CVs alone will not solve the zombie problem.”

Secondary buyers selectively cherry-pick the best performers inside a fund portfolio. That leaves the remaining, lower-quality businesses behind in an orphaned vehicle with no management attention, no follow-on equity, and no clear buyer. The headline liquidity generated by a single continuation fund masks the decay of the remaining portfolio.

Management Fees Keep Dead Vehicles Moving

When a fund enters its tail end without generating carried interest, economic alignment between GP and LP breaks down. A sponsor that cannot hit its hurdle rate has little financial incentive to run a formal sale process that triggers a realized loss.

Instead, the GP maintains the status quo. Ramsower outlines the resulting stalemate: “A zombie fund is a fund that has stopped making new deals, also can't raise capital. It's neither dead, because the fund still has assets in it, It's not alive either, because they're not adding to those assets and they have no more dry powder.”

Because fees are often calculated on invested cost or unadjusted net asset value rather than distributed cash, sponsors earn steady revenue merely by holding onto assets. “A GP is collecting fees on NAV or on their cost basis that hasn't converted to cash in years,” Ramsower notes. “There's little incentive for them to force a sale because they may not be in the carry. There may not be any more cash coming in when they sell.”

For institutional investors like the Teacher Retirement System of Texas, these zombie funds turn into operational drains. LPs must track valuations, audit statements, and staff monitoring seats for funds that will never generate returns above their initial hurdle.

Why It Matters

This dynamic signals a permanent bifurcation in private equity capital formation. While top-quartile managers continue to access institutional liquidity, mid-tier sponsors who overpaid during the zero-rate era face slow obsolescence as unreturned capital chokes off their successor funds. Institutional allocators will increasingly treat legacy fund marks with deep skepticism, shifting commitments toward shops with clean distributions rather than paper gains.