[Edaily Marketin YunJi Kim Reporter] 'Warning Signs → Zombies → Hungry Zombies'

As the number of portfolio companies in the U.S. private equity market that have remained unrecovered for an extended period rapidly increases, the industry has begun categorizing the status of these assets into distinct stages. Assets that are difficult to sell at the desired price or to inject additional capital into—due to a combination of high debt burdens, poor performance, and delayed exits—are classified as so-called “zombies.”

In particular, private equity firms that acquired companies at high valuations during a period of abundant liquidity are now facing both high interest rates and corporate valuation adjustments simultaneously, leading to a rapid accumulation of such assets. In this environment, as exit channels through traditional mergers and acquisitions (M&A) and initial public offerings (IPOs) narrow, GP-led secondary transactions and continuation funds are emerging as new exit strategies.

Global PE Firms Hold 4,568 Companies for Over 5 Years

According to global market research firm PitchBook on the 24th, of the 13,509 companies in U.S. private equity firms’ portfolios as of the end of 2025, 4,568 (33.8%) had been held for more than five years since acquisition. Of these, 2,536 had not yet exited even after the typical exit period had passed. As long-term holdings have accumulated, the net asset value (NAV) of investments remaining in buyout funds established more than seven years ago has exceeded $860 billion (approximately 1,188 trillion won). This is an unusual scale, considering that U.S. private equity firms have typically recouped their investments through sales or initial public offerings (IPOs) within about three to five years after acquiring a company.

It is not merely a matter of longer holding periods. As of 2021, there were 6,437 U.S. private equity portfolio companies—including those acquired that year—that had been held for more than five years; of these, 3,332 (approximately 52%) had not engaged in any significant transactions—such as additional acquisitions, recapitalizations, or refinancing—since the end of 2021. PitchBook noted that this prolonged lack of activity suggests not merely that GPs have been inactive, but that their financial options may have narrowed.

The accumulation of these assets in the market stems from aggressive acquisitions made during a period of abundant liquidity. Between 2020 and 2021, global private equity firms leveraged abundant liquidity and relatively low interest rates to pursue leveraged buyout (LBO) strategies, acquiring companies at high multiples as competition for acquisitions intensified. The situation changed as interest rates rose. While interest burdens increased, the number of buyers willing to pay the acquisition price at the time of purchase dwindled. In this situation, selling at a bargain price would lower returns, while holding onto the assets posed obstacles due to fund maturities and LPs’ demands for capital withdrawal.

As a result, some portfolio companies are using the PIK (Principal and Interest Payment) method—where interest is added to the principal rather than paid in cash—to reduce their immediate cash burden. Furthermore, as the proportion of “covenant-light” loans—which have looser financial covenants—has increased, there is less room for the lending syndicate to intervene early even if the company’s financial condition deteriorates. While these companies may not default immediately, they are increasingly prone to a prolonged “zombie state” in which exits are continually postponed while they remain burdened by high leverage and debt.

Continuation Funds as an Alternative to Stalled M&As and IPOs

As traditional exit markets have stalled, the secondary market is actually benefiting from this situation. A prime example is GP-led secondary transactions in which portfolio companies belonging to existing funds are transferred to newly established continuation funds. This structure gives existing LPs the option to either realize cash or reinvest, while allowing GPs to hold onto the companies for longer. The expansion of the global secondary transaction volume to a record high last year is also linked to this demand.

However, according to PitchBook’s analysis, continuation funds are not a solution for all long-term holdings. Since secondary investors also price assets based on a company’s performance and debt levels, the transaction itself becomes difficult if there is a significant gap between the value expected by the GP and the price accepted by the market. The analysis further explains that the longer the sale is delayed, the less cash LPs actually recover, and the greater the uncertainty regarding when the book value will be realized.

Capital markets view the likelihood of “zombie assets” immediately escalating into a systemic crisis as low. The explanation provided is that, since private equity funds have a closed-end structure with limited redemption pressure, they have the flexibility to hold onto distressed assets rather than dispose of them immediately. The problem is that this process may also delay the sale of assets and the recognition of losses. Concerns have been raised that if credit conditions or corporate earnings deteriorate while a backlog of assets with delayed recovery continues to accumulate, the losses that have been postponed could surface all at once.

The report stated, “While it is difficult to view assets as problematic simply because a PE firm has held them for a long time, companies facing a combination of high leverage, poor performance, and delayed exits are likely to see their problems accumulate over time,” adding, “The current risk in the PE market lies not in immediate defaults, but in the continued accumulation of unsellable assets.”