#28 Zombie Funds: Where’s the money?
Do you know what a Zombie fund is?
Heard about this from my professor Atul Kedia in PEVC Course...
Let us start from the basics - What is a fund?
In the investment industry, a fund is a pooled vehicle where Limited Partners invest and General Partners manage these investments. This fund could be a Venture Capital Fund, a Private Equity fund or that of a Hedge Fund.
What do GPs (General Partners) do?
Based on the theme of the fund (emerging market, pharma, deep tech etc.), these funds invest in a portfolio of companies. If it is a venture capital fund, it would invest in startups; if it is a private equity fund, it would invest in a mature company.
The GPs are the money managers and screen these deals, invest in these companies and exit at the right time in order to provide return to the investors (LPs - Limited Partners)
What is a Zombie Fund?
The usual period of a fund is 5-7 years. After which the GPs start winding it up as investors would want to see some returns now.
A Zombie fund is one that still holds some or all of its assets beyond the intended period. This could be due to two reasons:
a. The market is slow and the fund is struggling to sell its investments for a profit
b. The GPs want to hold on to that fund to just enjoy the management fees
How many Zombie funds exist?
As per an article by Forbes, in 2019 there were 1,100 zombie funds: fees collecting funds with assets more than 10 years old.
What gives rise to these zombie funds?
When the market is not conducive for getting a good buyer or getting an exit through the public markets (IPO), usually in high interest rate environments.
There were a lot of zombie managers post the 2009 Global Financial Crisis and the industry expects more this year given the higher sustained cost of debt in US.
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