Rising rates and stalled sales trap capital in private equity funds, challenging institutional investors
Private equity’s “zombie company” problem is quietly locking up billions in institutional capital, as firms struggle to exit businesses that can neither grow nor attract buyers—even at a discount.
CNBC reports that these companies, often unable to generate enough cash to service their debt, remain stuck on fund balance sheets well past their intended holding periods.
The situation has intensified since 2022, when central banks began rapidly raising interest rates. Many private equity firms had previously loaded up on “very cheap” debt in 2020 and 2021, but now face soaring debt service costs.
Oliver Haarmann, founding partner at Searchlight Capital Partners, explained that companies are struggling with cash flow due to rising interest rates.
He said, “They don’t have enough cash flow because of the rising interest rates to keep investing in growth.”
He also noted, “there aren’t potential buyers for [these companies], and that’s a really big challenge for our whole industry.”
For institutional investors such as pension funds and insurers, the impact is significant.
Nearly half reported exposure to vehicles unlikely to exit assets or secure new commitments, according to a 2024 survey by a major secondaries asset manager cited by CNBC.
This means capital is trapped in “zombie funds,” limiting liquidity and the ability to pursue new investment opportunities.
The average holding period for private equity portfolio companies has reached a record 5.6 years, according to VDS Consulting Group, while PwC estimates that firms are sitting on about US$1tn of unsold assets that would typically have been exited under normal conditions.
The traditional private equity approach—riding out downturns, refinancing, and waiting for markets to rebound—has become less effective.
“Private equity firms are having difficulties because the machine is stuck,” said Oliver Gottschalg, professor at HEC Paris. He noted that “zombie” assets are becoming more frequent and harder to clear, reminiscent of the post-2008 financial crisis environment.
This backlog is challenging the very mechanics of private equity, where funds are structured to turn assets into cash by a certain deadline.
“Waiting around for the undead to resuscitate is often not a luxury available to a PE firm,” wrote Nastascha Harduth and David Pinnock of Cliffe Dekker Hofmeyr.
General partners, who manage the funds, often hesitate to liquidate these companies, as doing so locks in losses and can jeopardize future fundraising.
“It is easier to keep the corpse politely seated at the board table than to host a funeral that invites post-mortems,” they observed.
In stressed markets, such as South Africa’s, a failed sale process can further stigmatize an asset, making it even harder to exit.
“A failed sale process is its own horror story, carrying nearly as much of a stigma as a liquidation for PE firms and, because the failure becomes known, makes the asset even harder to sell.”
CNBC said that a potential solution may be emerging.
Gottschalg points to the rise of mass-affluent and private wealth capital—the “retailization” of private equity—as a possible pressure valve.
Unlike traditional funds backed by pensions and endowments that target 25 percent net returns, this new pool of capital accepts lower return thresholds of around 10–12 percent and potentially longer holding periods, offering a lower cost of capital.
While these investors are unlikely to acquire truly broken companies, their flexibility and scale could “help unblock the temporary freeze” by absorbing assets that no longer fit the traditional private equity model.
