According to Financial Times News, EQT CEO Per Franzén predicts that 80% of private capital firms could become zombie firms within the next decade, surviving only to manage existing investments without raising fresh capital. Franzén revealed that only about 5,000 of the 15,000+ private capital firms have successfully raised funds in the past seven years, and he expects fewer than half will succeed in the next fundraising cycle. The industry faces a deepening crisis as private equity groups struggle to return cash to investors amid a dealmaking drought, forcing firms to rely on continuation vehicles and fee extraction from existing funds. Preqin data shows private equity funds reaching “final close” in 2024 are on track for the lowest count in at least nine years, though CVC CEO Rob Lucas believes long-term demand for private capital remains immense. This stark warning signals an industry transformation that demands deeper analysis.
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Table of Contents
How Private Equity Zombies Actually Function
Unlike traditional zombie companies that survive on debt refinancing, private equity zombies face a different existential threat. These firms continue managing existing portfolio companies while unable to raise new funds, essentially becoming asset managers for legacy investments. The critical distinction lies in the private equity business model, where management fees from new funds typically cover operational expenses and talent retention. When fundraising dries up, firms face a slow death spiral where they can’t pay competitive compensation, leading to talent drain and eventual dissolution. This creates a particularly dangerous situation for private equity limited partners, whose assets remain trapped in funds managed by increasingly desperate general partners.
The Perfect Storm Creating This Crisis
Several converging factors have created this industry-wide reckoning. The Federal Reserve’s aggressive interest rate hikes have fundamentally altered capital allocation mathematics, making leveraged buyouts less profitable and exit markets more challenging. Simultaneously, institutional investors face their own liquidity constraints, with many overallocated to private markets after years of strong returns. The denominator effect has forced many limited partners to reduce new commitments, creating a supply-demand imbalance in fundraising. Additionally, the industry’s success in growing to over 15,000 firms has created unsustainable fragmentation, with too many managers chasing finite capital. Sweden-based EQT Partners and other European firms face particular pressure as regional banks retreat from leveraged lending markets.
The Dangerous Reliance on Financial Engineering
Continuation vehicles represent a temporary solution that could exacerbate long-term problems. These structures allow firms to transfer assets from older funds to new vehicles, generating fresh management fees without true market validation. While they provide immediate fee relief, they create several hidden risks. Limited partners face pressure to reinvest in assets they already own, potentially compromising portfolio diversification. The valuation process lacks arm’s-length transparency, raising questions about whether these transactions represent genuine value creation or financial engineering. Most dangerously, continuation vehicles enable firms to postpone necessary consolidation, allowing weaker managers to linger rather than merging with stronger partners or winding down gracefully.
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Who Survives the Great Consolidation
The coming decade will create clear winners and losers, with several distinct survival strategies emerging. Mega-firms like Blackstone, KKR, and Carlyle will likely dominate, leveraging their brand recognition, diversified platforms, and massive scale to capture disproportionate capital flows. Specialized boutiques focusing on specific sectors or geographies may survive by demonstrating unique expertise and superior returns. The middle market faces the greatest pressure, with hundreds of generalist firms likely to merge or disappear entirely. The real casualties will be firms that grew rapidly during the zero-interest-rate period without establishing sustainable competitive advantages or differentiated investment theses.
What Limited Partners Must Consider Now
Institutional investors face critical portfolio decisions in this environment. The traditional approach of spreading commitments across multiple managers becomes riskier as zombie firm probability increases. Limited partners must conduct deeper due diligence on manager sustainability, assessing not just historical returns but fundraising track records, fee structure resilience, and succession planning. There’s growing pressure to concentrate allocations with proven performers, potentially sacrificing diversification for security. The secondary market for private equity interests may see increased activity as investors seek liquidity from potentially troubled relationships. According to coverage from Financial Times and other financial media, this represents the most significant industry restructuring since the 2008 financial crisis.
Beyond the Crisis: Industry Evolution
The surviving private equity landscape will look fundamentally different from today’s fragmented market. We’re likely to see the emergence of permanent capital structures, increased public market listings of alternative asset managers, and greater emphasis on evergreen funds that reduce fundraising pressure. The industry may also accelerate its shift toward private credit and real assets as traditional buyout opportunities diminish. Most importantly, the era of easy fundraising is over, forcing managers to demonstrate genuine operational expertise and sector specialization rather than relying on financial engineering and market beta. This painful consolidation ultimately benefits the industry by weeding out weaker performers and forcing surviving firms to focus on sustainable value creation.
