A RECORD number of private equity firms will turn into so-called zombie funds this year, as they struggle to reel in new investor cash, according to Ian Charles, co-founder and managing partner at Arctos Partners.
“The fundraising environment is so challenging,” Charles said in an interview with Bloomberg TV on Thursday (Sep 11), adding that fewer new private equity firms will be founded this year. “Today, firms are having a really hard time maintaining their growth trajectory.”
Private equity has entered a third year of low deal volume which has, in turn, narrowed profits for fund managers and their investors and dampened fundraising efforts for newer funds.
More than 18,000 private capital funds worldwide are in the process of soliciting investor cash, according to a Bain & Co report. That translates into $3 of demand for every $1 of supply.
Buyout firms almost never collapse. Instead, they risk turning into zombie funds with fewer employees, who will manage existing investments with less capital and with no money to make new investments.
“As soon as you start to lose growth, you start to lose your talent,” Charles said, defining zombie funds as those that haven’t raised capital from institutional investors in seven years. “That will be a theme that starts to emerge over the next 24 months.”
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Other buyout shops have echoed fundraising concerns and have been outspoken about the challenges facing the sector.
“The private equity industry is going to go through an evolution and it’s going to be a Darwinian evolution,” Apollo Global Management president Jim Zelter said on Bloomberg TV last week.
Because of “the challenges of monetisation, the challenges of upfront capital commitments, there will be fewer and fewer firms that are able to go to investors and have that dialogue and have that relationship”, he said.
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KKR & Co chief financial officer Robert Lewin also recently said he expects private equity firms to start disappearing amid a prolonged drought of dealmaking.
“You’re going to see a fair bit of GP consolidation over the next five years,” Lewin said, referring to general partners, the industry term for private equity firms. “And that should inure to the bigger players, and certainly the players who’ve been able to deliver on behalf of their clients, and we feel well-positioned there.”
Dallas based-Arctos primarily invests in sports franchise owners and the professional sports industry. Its Keystone business provides growth capital and liquidity solutions to general partners across private equity, credit, real estate and digital infrastructure.
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