Zombie funds are private equity or venture capital vehicles that outlive their expected lifespans — typically 7 to 10 years — but fail to produce real returns or meaningful exits. They hold on to illiquid, hard-to-value assets and continue charging management fees well past their prime.
Key traits:
These aren’t dormant shells. They’re still active, but with no clear direction. They drain capital, strain relationships, and jam up the secondary market.
There’s no singular cause. Zombie funds emerge from a perfect mix of macro shifts, failed exits, and misaligned incentives.
“Even funds with near-zero returns are still reporting NAVs of 25%–60% of committed capital years after launch” – MSCI
Source: MSCI
Institutional LPs, including pension funds and endowments, bear the brunt of zombie fund drag. Their capital gets stuck in stagnant vehicles, limiting their ability to reinvest or plan liquidity. Performance drags while management keep ticking. That’s a frustrating combo.
Disagreements also arise over whether to hold out for a future turnaround or take a discount in the secondary market. Worse, some LPs may feel pressured to accept restructuring terms that disproportionately benefit the GP.
Zombie funds often signal the end of the road for a GP franchise. Difficulty raising a follow-on fund is usually both a cause and symptom. Without future carry or capital, GPs face operational costs but reduced motivation. Legal, administrative, and compliance work must still be done—but with no clear upside.
Managing a zombie fund becomes reputational quicksand. Even responsible managers who want to do right by LPs may find themselves stuck between underperforming assets and skeptical investors.
Startups or businesses backed by zombie funds end up in limbo. They struggle to raise additional rounds, especially if the fund can’t or won’t lead. VCs in zombie mode may push for early exits to return — even when that cuts long-term value.
And once word gets out that a startup’s lead investor is “zombified”, future backers get cold feet. These companies often become walking dead themselves.
| Signal | Implication |
|---|---|
| Fund >12 years old | Approaching deadweight territory |
| NAV remains high, but no exits | Trapped capital, over-valuation risk |
| Fundraising halted | GP has no incentive to improve performance |
| Stalled follow-on investments | Portfolio companies left unsupported |
| Fee collection continues | Misalignment with LPs |
Early detection gives LPs time to reduce exposure or push for change — whether through secondaries, GP-led restructurings, or engagement via LPACs.
Don’t just look at early IRRs. Scrutinize how funds age. Check DPI ratios, use of extensions, and return activity after year 9. Ask how GPs handle tail-end assets, and whether they’ve ever waived fees on stale portfolios.
Even at a discount, selling a zombie fund interest can free up liquidity. But LPs shouldn’t rush to sell without exploring GP-led restructurings. These often offer a dual option: cash-out at today’s NAV or roll over into a new vehicle with better-aligned terms. In both scenarios, transparency is key.
Engaged LPACs can influence how extensions are handled, demand better reporting, and push for independent valuations. When zombie dynamics begin to appear, LPACs should be pressing for concrete action — not just updates.
Traditional cash flow models often assume declining residual value and steady distributions in later years. But zombie funds break this pattern. LPs should use scenario models and input stress tests to account for tail-risk capital lock-up.
If you’re managing a fund on life support, honesty and action matter.
The most obvious goodwill gesture is to stop — or at least reduce — management fees once the investment period ends. If no new deals are happening and the portfolio is static, continuing to charge 2% erodes trust. Consider fee holidays or tying fees to NAV instead of committed capital.
A GP-led secondary isn’t just a salvage job — it’s a chance to realign incentives. A third-party buyer can purchase some or all LP stakes, fund an extension, and give the GP carry potential with refreshed terms. This creates breathing room while giving LPs optionality. But success depends on clear disclosures, fair pricing, and LP buy-in.
Holding unrealistic NAVs delays tough decisions. If exits are unlikely, distributing portfolio company equity (where practical) or marking down assets may be necessary. LPs may prefer owning direct stakes or even equity scraps overpaying fees indefinitely on paper values.
Zombie funds can’t be managed through silence. GPs who acknowledge the situation — and outline a roadmap — stand a better chance of preserving LP relationships. This includes regular updates, open discussions about options, and, where needed, third-party validation.
Zombie funds exist in a regulatory grey area. There’s no explicit rule that says a fund must wind up by a certain year. But regulators are increasing pressure through indirect means:
The broader concern is capital misallocation. When zombie funds linger, they distort performance data, crowd the ecosystem, and indirectly suppress innovation by tying up capital.
This Texas-based VC firm raised nearly $1B in its tenth fund. But after the 2008 crash, exits slowed. The fund shifted focus to follow-ons only. A successor vehicle never materialized, and many LPs marked it as a write-down. It’s now a textbook example of zombification (CB Insights).
Once a promising European seed-stage firm, Stride’s leadership stepped away from new fundraising. Their second fund struggled with follow-ons, and capital dried up. Without a third fund or major exits, the fund slipped into a holding pattern — effectively frozen.
The biotech sector has seen a rise in “walking dead” funds. Drug development takes time, and IPO markets have been weak. Firms like Tang Capital Partners now specialize in buying and liquidating these assets to return cash to shareholders — often by acquiring failing biotechs at a discount and dismantling them (BioPharma Dive).
Zombie funds aren’t just statistical noise. They:
If you’re an LP: Stay aggressive on diligence, secondaries, and restructuring. If you’re a GP: Prioritize transparency and fast, fair resolutions over clinging to theoretical NAVs.
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