Private equity funds categorized as "zombies" now hold $1.2 trillion in assets, representing 12 percent of global private equity assets under management. The figure has expanded 38 percent year over year and nearly tripled since 2019, according to Treo Asset Management analysis of Preqin, PitchBook and Jefferies Global Secondary Market Review data.

Zombie funds are defined as vehicles older than 10 years that have ceased making new investments but retain portfolio companies. General partners often struggle to sell these assets without incurring losses or sacrificing incentive fees.

The surge stems from massive private equity fundraising between 2018 and 2020, followed by a sharp slowdown in exits. Elevated valuations paid before interest rates rose are now impacting investor portfolios. The average age of zombie funds tracked by Treo stands at 14 years.

A survey by secondary private equity firm Coller Capital found that more than half of respondents anticipate zombie fund growth in their own portfolios over the next two years. These investors attribute the rise to longer holding periods and valuation challenges created by higher interest rates.

Both large and small private equity firms hold zombie funds. Finbarr O'Connor, founding partner of Treo Asset Management, noted that regulatory issues or ongoing litigation can complicate asset sales.

Many general partners are unwilling to liquidate older funds because it would mean forfeiting management fees. O'Connor confirmed instances where GPs continue collecting fees even during a company's liquidation, a practice that frequently frustrates limited partners.

Dan Rasmussen, founder of hedge fund Verdad Advisors, highlighted the issue of trapped capital for allocators. Investors did not fully anticipate their money becoming illiquid when they increased private equity allocations after the 2008 market crash.

Maintaining these funds carries risks for sponsors. Firms that consistently fail to return capital may find it difficult to secure commitments for subsequent funds, impacting future fundraising capabilities.

Treo projects zombie fund value will grow to $2 trillion in the next few years as more fund vintages age without successful exits.