The best time to take on a zombie fund is early in its long, nearly interminable life, is the key finding of this deep dive into private equity and private credit zombie funds.
Indeed, it is possible to spot the potential for long-term underperformance in private equity and private credit fund as early as year five, according to new research from Upwelling Capital, led by Joncarlo Mark and Eric Green, who share their findings in this episode of Liquid Courage.
"How to Spot a Zombie Fund Before It's Too Late" offers market insights into zombie funds - how they perform relative to funds that are merely bottom-quartile, how to define and spot them, why it is important to remove them from your portfolio before the long-term value erosion kicks in, and how clawbacks complicate things further.
Among the key takeaways of this episode:
• Early action is the only antidote. LPs who identify underperformance by year five can limit new capital deployment, terminate the investment period, or pursue a secondary sale while the fund still has meaningful value — all options that become far less effective the longer they wait.
• Year five is the decision point. Bottom decile funds peak at ~1.1x TVPI by year five and never meaningfully recover, making that the last realistic window to act before value erosion becomes irreversible.
• Zombie credit funds perform no better than zombie private equity funds in the long term.
• The costs are real, not just theoretical. Beyond opportunity cost, LPs in zombie-bound funds face hard dollar losses on multiple fronts — management fees charged well past their contractual end, monitoring fees extracted from portfolio companies, and the compounding damage done to the underlying businesses themselves, whose long-term value erodes when they are stranded inside a fund with no fresh capital, misaligned management, and no path to a disciplined exit.
• Zombie status requires more than bad returns —Upwelling's diagnostic requires a pattern of fourth-quartile performance across multiple funds, a 50%+ fundraising haircut on subsequent vehicles, and contraction of strategy breadth, not just a single underperforming fund.
• The secondary market offers a exit, but timing is everything. The liquidity market has matured enough to provide a genuine escape route for LPs in deteriorating funds, but bottom decile positions are extremely hard to sell and will attract steep discounts, making year five or six — when the fund still has some TVPI — the optimal window to pursue a secondary before buyers lose interest entirely.
Access the full transcript and a searchable archive on the Liquid Courage Substack:
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