"Scary" Even Industry Leaders on Edge... Warning Issued: "80% Could Become 'Zombie Companies'"

"Only 5,000 Out of 15,000 Private Equity Funds Raised Capital in the Past 7 Years"

Per Franzen, CEO of EQT, one of the world’s top three private equity fund (PEF) managers, has warned that within the next decade, 80% of global private equity firms could devolve into “zombie companies.”

In an interview with the Financial Times (FT) on November 2 (local time), CEO Franzen stated that out of more than 15,000 private equity funds currently in existence, only about 5,000 have succeeded in raising capital over the past seven years. He added, “How many of these firms will be able to successfully complete fundraising in the next five to ten years? It will be less than half,” predicting, “The number of zombie companies will increase by about 2,000.”

Reuters Yonhap News

EQT is a private equity firm founded by the Swedish Wallenberg family, managing assets worth 266 billion euros (approximately 438 trillion won). CEO Franzen has worked at EQT for about 20 years and was appointed CEO in May this year.

Recently, the private equity industry has faced a funding crunch due to a sharp decline in deal activity. As a result, private equity firms are increasingly relying on “continuation funds,” a method where they resell existing assets to themselves instead of selling them to external parties, in order to boost fee income from existing funds. This approach generates new management fees to compensate for the lack of fresh fee income.

However, CEO Franzen pointed out that continuation funds are not a long-term solution. He said, “Squeezing fees from existing funds and opportunistically extending fund life is not a sustainable business model,” adding, “That approach does nothing to attract or retain the best talent in the industry.” He further noted, “Such firms will ultimately disappear.” Previously, FT and Bloomberg also highlighted criticism that, while such transaction practices in the private equity industry may appear efficient, they are essentially a form of circular trading.

CEO Franzen predicted that, in the future, only 50 to 100 globally diversified private equity firms will absorb 90% of all capital inflows.

According to market research firm Preqin, as of October this year, the number of private equity funds reaching final close has hit its lowest level in nine years.

However, some remain optimistic, projecting that capital inflows will increase over the long term. Rob Lucas, CEO of CVC, said, “If you look at the core trends in private equity over the next 10 to 20 years, the scale will be enormous.”

Private equity firms are closely watching the U.S. retirement pension market after the Donald Trump administration issued an executive order earlier this year allowing 401(k) retirement plans to invest in a wider range of alternative assets. They are also focusing on attracting high-net-worth individuals as a new source of capital through semi-liquid products listed on public markets.

CEO Lucas stated, “There will be companies making a comeback,” adding, “New firms will emerge in the market, and there is real potential for smaller managers to grow.”