Zombie funds paralyse 10% of Asian PE assets

Some $18 billion in regional private equity AUM is trapped in inactive vehicles, with nearly half of Indian funds thought to be among the walking dead.
Zombie funds paralyse 10% of Asian PE assets

About $18 billion in Asia-focused private equity assets are held in so-called zombie funds, which are effectively inactive but continue to collect management fees from investors, according to data provider Preqin.

Of the $116 billion in total zombie assets that are collectively held by 1,200 vehicles globally, Asia accounts for about 10% of the AUM, indicates a new report from the company.

It is attributable to 109 inactive Asia-focused funds that have passed their typical holding period, with general partners (GPs) having no clear plans to raise a successor fund.

While GP zombie funds are unable to collect performance fees, they “continue to charge management fees ... and tie up [investor] cash for longer than any party initially intended”, says Preqin.

It defines zombie funds as those that held a final close between 2001-06 and have active managers that have not raised a follow-on fund after 2006.  

Performance is also a determining factor, with zombie funds generally having poorer-than-average performance, says Preqin. Zombie funds that closed in 2003 have distributed, on average, 39% of paid-in capital back to investors, against 99% by their healthier peers. 

There are indications that the once-hot Indian PE market accounts for a notable portion of Asia’s zombies. India-based data provider VCCEdge last year estimated that nearly half of the subcontinent’s PE and venture capital funds are inactive, with only 267 vehicles having struck at least one investment in the market from January 2009 to June 2012.

A handful of firms that did not invest during that period were identified by VCCEdge and include global firms Och Ziff Capital Management Group, Avenue Capital, Pinebridge Capital, Blue Ridge Capital and Rutley Capital Partners.   

A combination of tax guideline changes, a difficult exit market and rupee depreciation in India has turned the market from a pre-crisis PE hotspot in Asia into a zombie zone.

One way out of the PE dead zone is for GPs to sell portfolio assets held in zombie funds through the PE secondary market, which is picking up steam in Asia. There are 1,732 portfolio companies held by zombie funds globally, according to Preqin, although no separate data was available for Asian businesses.

“The secondary buyout market goes some way in offering a solution to return capital to investors,” notes Preqin. However, secondary deals are not a panacea, with GPs of the zombie funds unlikely to see any returns from their investments. 

While some victims of zombie funds might be frightened from making further allocations to private equity, they seemingly comprise a small proportion of investors.

Sentiment for the asset class has not dampened, Preqin notes, with 87% of investors polled last December indicating that they plan to maintain or increase their allocation to private equity in the next 12 months.

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