(Bloomberg) — Private equity investors see a growing number of “zombie funds” tying up their money, according to a survey by secondary asset manager Coller Capital.
Almost 50% of pension funds, insurers or other investors already have money in funds that have little hope of liquidating their assets or raising a successor vehicle, while 28% expect to see such funds appear in their portfolios. them, the survey found.
“Recent years, marked by inflation and high interest rates, have undoubtedly had an adverse impact on the growth prospects of portfolio companies, which could lead to an increase in zombie funds,” the report said.
Coller surveyed 110 private equity investors, also known as limited partners, in North America, Europe and Asia. The firm manages $33 billion, according to its website, making it one of the largest investors in the secondary market, which allows investors to cash out of their private equity positions before the funds close.
Findings come in a moment of crisis for private capital. With higher interest rates making capital more expensive for both buyers and sellers, buyout funds are scrambling to get the price they want for exiting investments while also dealing with higher funding costs for companies their portfolio.
About 64% of limited partners surveyed also believe that at least one of the private equity managers they are currently invested with will merge with or be acquired by another manager in the next two years, Coller said.
Read more about the rising tide of zombie funds
The survey showed that 57% of investors are unhappy with the use of NAV finance in the private equity industry, with one of the main concerns being the introduction of additional leverage into the system.
The sector has increased its use of NAV financing – which allows private equity firms to borrow against a group of their portfolio companies – as traditional borrowing options are drying up. The loans are usually costly, and critics warn that they are likely to reduce returns later.