Zombie funds: the great illusion of private valuations hits its limits

Zombie funds: when valuations outlive markets

For years, private equity sold a simple story: less volatility, more return and value creation superior to listed markets. But in 2026, one question becomes impossible to avoid: do the valuations displayed by many funds still reflect economic reality?

The “zombie funds” phenomenon is not new. Traditionally, the term designated funds reaching the end of their life, unable to sell their holdings but continuing to exist thanks to management fees. Today, the concept has broadened. It now encompasses thousands of private assets whose value is maintained on paper even as exit conditions have sharply deteriorated.

The problem is first a liquidity problem. Since the rate cycle turned in 2022, initial public offerings have become scarce, mergers and acquisitions have slowed, and strategic acquirers have become far more selective. As a result, funds hold their stakes much longer than planned.

Faced with this absence of exits, managers find themselves in a dilemma. Selling today would often mean accepting multiples lower than those used in their internal valuation models. Not selling, on the other hand, preserves a higher net asset value (NAV) and avoids crystallising losses.

This is where the heart of the problem appears. Unlike listed markets, where the price is continuously discovered, private assets are valued periodically according to internal models. As long as no transaction takes place, the displayed value stays largely theoretical.

Institutional investors are beginning to wonder. Several large private-credit funds have recently limited their clients’ withdrawals in the face of rising liquidity demands. When too many investors want their money back simultaneously, the theoretical valuation runs into the limits of the real market.

To buy time, the industry has developed a whole series of financial tools. The most emblematic is the continuation fund. Concretely, a manager transfers an asset from an old fund into a new vehicle, offering partial liquidity to investors while keeping the asset under control.

In parallel, NAV loans are seeing explosive growth. These financings use the portfolio’s assets as collateral to generate cash without selling the holdings. The market now exceeds $100 billion.

This evolution recalls an old financial lesson: liquidity is abundant right up to the moment everyone needs it simultaneously.

This does not mean that all private valuations are artificially inflated. Some fund-owned companies keep growing and fully justify their multiples. The large players with quality assets and privileged access to capital seem better equipped to weather this period.

The real question for the years ahead is therefore not whether zombie funds exist. They already do. The question is how many current valuations would survive a genuine price discovery on a deep and liquid secondary market.

For investors, the lesson is simple: a valuation is not a price. Until an asset has found a buyer, its value remains, above all, a hypothesis.