Zombie Firm

In the private equity world, a zombie firm is a private equity firm that is unable to raise fresh cash to enhance current investments in order to monetize them.

Zombie firms generally retain some businesses in their portfolios that cannot be optimised or grown without new funding. Due to the possibility that these firms generated substandard returns on previous investments, limited partners are unlikely to commit further capital to assist these average portfolio companies in achieving a liquidity event. Eventually, the companies will be liquidated at a lower rate of return or at a loss, exacerbating zombies’ incapacity to acquire further capital commitments from LPs.

The term “zombie” refers to the undead state in which zombie businesses exist. They are not legally dead, but they may as well be, given their inability to raise new funds. Competition for funds among private equity firms is cyclical, and not everyone will be funded at some point. Additionally, limited partners continue to demand a higher rate of return and reduced risk from their general partners. This push for increased accountability on the part of general partners is sorting out the best from the rest, resulting in an increase in zombie businesses that will eventually vanish.

The concept is critical to a business owner since it requires an additional level of attention on the part of the portfolio company. Not only must you get along with the PE firm with whom you select to do business, but it can also be beneficial to be aware of their historical performance. If your investor is a zombie, this is a bad condition because it reduces your possibilities of expanding, shortens your time horizon, and may result in you being forced to sell as a distressed position.

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