Seasoned Industry Executive: In the next ten years, 80% of private equity firms will become zombie companies.
Per Franzén, CEO of Swedish private equity giant EQT, has warned that over the next decade, around 80% of global private equity firms may become zombie companies—managing only their existing portfolios without being able to raise new funds.
In an interview with the Financial Times on Monday, Franzén said that among the more than 15,000 private equity firms currently in existence, only about 5,000 have successfully raised funds in the past seven years. He predicts that in the next five to ten years, fewer than half of these firms may be able to successfully raise funds, with the number of zombie companies increasing by several thousand more.
This pessimistic forecast reflects the severe structural challenges facing the private equity industry. In recent years, due to sluggish deal activity, private equity funds have found it difficult to return capital to investors, and the fundraising environment has continued to deteriorate. According to data from Preqin, by last October, the number of private equity funds completing final closings for the year had hit at least a nine-year low.
Franzén expects that in the next fundraising cycle, only 50 to 100 globally diversified firms will capture about 90% of all capital flowing into the private equity market. This means the industry will see an unprecedented concentration, and a large number of small and medium-sized firms will face a survival crisis.
Fund Continuations Hardly a Lifeline
To cope with fundraising difficulties, many private equity firms have turned to increasing management fee revenue from existing funds and relying more on fund continuations—a tool that allows buyout firms to continue holding some investments by selling assets to themselves. In recent years, fund continuations have rapidly gained popularity, enabling firms to generate new management fees from assets that might otherwise have been sold to external buyers.
But Franzén made it clear that this is not a sustainable long-term business model. Squeezing fees from existing funds and opportunistically raising continuation funds is not a sustainable business model, he said. "This won’t help you attract and retain top talent in the industry. At some point, these firms will no longer exist."
New Funding Sources May Bring a Turnaround
Despite industry fundraising difficulties, some executives remain optimistic about the long-term outlook. Rob Lucas, CEO of private equity group CVC, said that demand for private capital will remain strong for the next ten to twenty years, with potential for capital inflows.
Private equity firms are exploring new sources of capital. Earlier this year, the Trump administration issued an executive order allowing 401(k) retirement savings plans to invest in a range of alternative assets, opening the door to the US pension market for private equity firms. In addition, firms are increasingly targeting wealthy individuals as a new source of capital, including attracting funds through semi-liquid structures listed in public markets. Looking ahead, Lucas believes there is still room for new firms to emerge, for small firms to grow, and for corporate revitalization.
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