Night of the Living Fund: The Rise of Zombie Private Equity
Key findings
- Private-equity funds are living longer with larger valuations, increasing the challenges of meeting allocation targets and managing liquidity.
- Simple cash-flow models that assume abrupt liquidation at the end of a typical fund life are less applicable to older funds, and more scrutiny is required to forecast cash flows.
- Valuations for more than half of all buyout and venture-capital funds that are active beyond their typical life now exceed 20% of committed capital and can greatly impact an LP’s portfolio when distributed.
Distribution rates across key private-asset classes, such as buyout and venture capital (VC), have been below historical averages, resulting in their carrying net asset value (NAV) later in their lives. Consequently, "zombie funds" — those funds that have outlived the average fund in their asset class — have become an increasingly important consideration for LPs concerned about liquidity in their private-capital portfolios.[1] These funds are distributing less than their historical peers, are more likely to remain active beyond the zombie age and are entering the so-called zombie phase with more NAV.
Observations on the recent behavior of older private-equity funds suggest that a simple cash-flow model, such as the Takahashi-Alexander (TA) model, may be more susceptible to overpredicting distributions from these funds. The MSCI Private Capital Cash Flow Forecast Model was developed to help investors address this tendency of the TA Model.[2]
The primary concern with respect to a zombie fund's liquidity is distributions. And because distributions are portions of NAV paid to investors, analyzing both the NAV and distribution rate of a fund approaching its average liquidation, or zombie, age is essential.
What's up with NAVs of private-equity zombie funds?
Based on data as of Q4 2024, the average buyout fund will liquidate after approximately 12 years and the average VC fund at around 15 years. Since 2021, one year before a fund reaches its zombie age, its NAV has been steadily increasing.
The median NAV for older buyout funds was close to 25% of committed capital and nearly 30% for venture capital. The NAVs of their historical peers were much lower: in the mid-to-low teens from 2016 to 2021 for buyout funds, and typically below 20% for VC funds before 2022. Furthermore, a substantial fraction of VC funds have an NAV exceeding 60% of committed capital.
The steady rise of zombie-fund NAVs
Data from Q4 2014 to Q4 2024. Interquartile range (shaded region) and median (blue line) NAVs for buyout funds aged 11 to 12 years and VC funds aged 14 to 15 years. Source: MSCI Private Capital Universe
The culprit is a lower distribution rate
We cannot look to higher market returns to explain the rising NAVs of private-equity zombie funds. Returns have been consistently low or even negative each quarter since Q1 2022, with Q2 2023 for venture capital the sole exception. The cumulative return over the 12 quarters ending Q4 2024 is near zero for both asset classes.
Higher zombie NAVs are not due to higher returns
Data as of Q4 2024. Quarterly returns for buyout funds aged 11 to 12 years and VC funds aged 14 to 15 years. Source: MSCI Private Capital Universe
Our focus must shift then to the funds' distribution rates. Across buyout and venture capital, over the 10 years ending Q4 2024, distribution rates rarely reached 50%, and were often much lower, beginning a downward trajectory in 2018.
These low distribution rates mean that many zombie funds are remaining active and carrying significant NAV well after the average fund has liquidated. Thus, for a portfolio of private-capital funds, liquidity may be considerably lower than a simple cash-flow model that assumes an abrupt liquidation would forecast.
Distribution rates are not only low, but falling
Data from Q4 2014 to Q4 2024. Annual distribution rates (in blue) for buyout funds aged 11 to 12 years and VC funds aged 14 to 15 years. Source: MSCI Private Capital Universe
Beware the buyout and VC zombie fund
The unexpected persistence of large valuations late in the lives of private-equity funds (in contrast to other private-asset classes such as debt and real estate) has brought them to the forefront for investors concerned about liquidity. Understanding this trend in buyout and VC funds — and its cause, lower distribution rates than widely used cash-flow models would suggest — is critical to LPs' assessments of their portfolio's liquidity profile.
1 In previous research, we defined a zombie fund as being 10 years of age or older with a NAV equal to at least 10% of commitment. Here, we define a zombie fund with an age at, or exceeding, the average liquidation age. Using 15 years of data as of Q4 2024, the average liquidation age is the age at which fund NAV first drops below 5% of commitment after reaching five years of age and calling at least 75% of committed capital.2 Whereas the TA model forces a fund to liquidate at the end of its expected life, the MSCI model (client access only) does not have such a constraint.
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