Private equity has always had a few portfolio companies that refused to leave the party. Today, however, the industry appears to be hosting an entire zombie convention. The occasional underperformer has given way to a growing pool of aging assets that remain operational and solvent but increasingly difficult to exit. According to PitchBook, more than one-third of U.S. private equity-backed companies have been held for over five years, with hold periods for thousands now exceeding the traditional exit window. The causes of this trend are not mysterious. In hindsight, the industry may have committed the cardinal sin of every market cycle: mistaking favorable conditions for permanent conditions. Between 2020 and 2021, sponsors acquired businesses amid an environment of near-zero interest rates, abundant leverage, and valuation multiples that appeared destined to move only upward. That said, when rates rose and multiples compressed in 2022, two of private equity’s favorite value drivers, cheap debt and multiple expansion, suddenly disappeared. The result was a cohort of companies purchased at EBITDA multiples of 12x or greater that now struggle to justify valuations of 10x or less.

These “zombie companies” tend to share a similar profile. Specifically, they tend to be older assets with extended hold periods, elevated leverage, slowing earnings growth, and limited buyer interest. Further, many have not completed a refinancing, recapitalization, add-on acquisition, or meaningful transaction in years. It is important to note that zombie companies tend not to be bankrupt. In fact, that is part of the problem. Thanks to covenant-lite loans, amend-and-extend transactions, and payment-in-kind interest, companies can survive almost indefinitely without truly improving. In short, these businesses are less “walking dead” and more “comfortably numb.”

For limited partners, the implications of this dynamic are becoming increasingly difficult to ignore. From a liquidity standpoint, DPI (a key performance metric in private equity that measures the cash returned to investors relative to the capital they invested) has lagged historical norms in recent time (particularly for 2018–2022 vintages), while TVPI (a metric that measures a private equity fund’s total return compared to the actual money investors have paid in) has remained stubbornly stable. In plain English, paper value is not turning into cash for private equity investors. Indeed, limited partners expected distributions but have instead received an education on quarterly valuations and continuation vehicles. More subtly, zombies threaten one of private equity’s defining advantages: efficient capital recycling. As managers spend more time extending maturities and defending marks (rather than sourcing exits), capital cannot be redeployed into new opportunities. Continuation vehicles, while often legitimate solutions to liquidity challenges, increasingly risk looking less like a value-creation tool and more like the industry’s version of moving leftovers into a different container.

The good news for limited partners is that the rise of zombie companies appears to be a growth inhibitor for the asset class rather than a systemic crisis, and it is important to remember that most private equity funds are designed to absorb precisely this kind of stress. The bad news is that patience, once considered a virtue, may now be considered a holding strategy. As the living learn, the dead rarely disappear on their own.

Since traditional exit routes have remained constrained in recent years due to higher interest rates, valuation gaps, and a subdued IPO market, continuation vehicles (“CVs”) have become an increasingly important liquidity tool for private equity investors. At a high level, CVs are investment structures in which a sponsor transfers one or more portfolio companies from an existing fund into a newly formed fund, allowing existing investors to either cash out or roll their investment while providing the manager with additional time to create value. While CVs do help to mitigate a challenging exit environment, they are also raising several considerations for fund investors. For instance, many are concerned about potential conflicts related to valuation, governance, and asset selection given the fund manager’s direct involvement in both the sale and acquisition process. These concerns often call for active discussions about asset valuation if third-party sales are considered. The economics of CVs have also been called into question by some, as the transfer of assets into a new vehicle can reset management fees and performance incentives for fund managers. Moreover, some CV structures include performance-related tiered carried interest arrangements, which may eventually result in a higher-than-industry-average fee paid by fund investors. Additionally, limited partners are closely examining the quality of assets being transferred since CVs can potentially reduce the impact of underperforming portfolio companies on a primary fund’s track record. CVs also offer less visibility into a fund manager’s ability to achieve traditional third-party exits, which remains an important measure of execution and realization capabilities.

More recently, the emergence of “CV-squared” transactions (in which assets move from one CV into another) has led to even more discussion around the ultimate path to liquidity and the alignment of incentives between fund managers and investors. While the rise of CVs is clearly a response to a market with constrained traditional exits, it is important to note that these structures are creating a more circular liquidity ecosystem that may make it harder for investors to evaluate portfolio company quality and exit opportunities. Ultimately, while continuation vehicles can provide valuable flexibility in a difficult exit environment, investors should carefully evaluate each transaction to ensure that governance, valuation, and incentive structures remain aligned with their long-term interests.

When Benchmark, one of Silicon Valley’s most renowned early-stage venture capital firms, closed $2 billion across two new funds this month (including its first-ever dedicated growth vehicle at roughly $1.3 billion), headlines were made. For nearly two decades, Benchmark was one of the industry’s most disciplined organizations, with funds capped at around $500 million and a conviction that backing the right companies at the right prices was preferable to deploying capital at scale. That thesis ultimately produced one of the strongest track records in venture capital.

Benchmark’s more recent moves are indicative of broader market dynamics. Indeed, VC-backed businesses are staying private for longer, an increasing share of enterprise value is being created after the traditional venture stage, and the capital required to participate in the initial phases of a company’s growth is now greater than what early-stage funds were built to provide. According to PitchBook, the median time to exit for unicorn companies was 9.2 years as of the end of last year. For an early-stage investor, that figure represents nearly a decade during which ownership stakes are tested via various financing rounds. For instance, a $400 million fund with pro-rata rights can participate in early rounds, but maintaining meaningful ownership across 10 years of financing requires capital that traditional venture funds were not designed to deploy. This means that the investor who backed the right company at the seed stage but lacked the capital to hold the position through subsequent financing rounds effectively did the difficult work of selection for someone else’s benefit.

In recent time, leading firms including Founders Fund, a16z, Thrive Capital, and Sequoia have launched dedicated growth vehicles, aiming to build out the capacity required to support portfolio companies across full lifecycles and avoid handing them off at the growth stage. It is important to point out, however, that growth investing is not simply venture investing with larger check sizes. Specifically, entry valuations are higher at this stage, requiring investors to underwrite not just a company’s potential but the return achievable at a given price. To that point, outcomes depend more heavily on public market conditions and exit timing, which are factors that no investor can fully control. In conclusion, venture capital is entering an era of convergence in which the most competitive firms are defined not by the stage at which they invest, but by their ability to support exceptional companies across a full lifecycle, meaning growth capabilities are increasingly becoming table stakes for venture firms seeking to build enduring franchises.

In the period between 2009 and 2022, private equity managers thrived amid an environment of low interest rates and rising asset prices, which led to financial engineering serving as a primary driver of portfolio value. In recent years, however, higher interest rates, elevated valuations, and tighter exit conditions have reduced the effectiveness of this value creation method. As a result, financial engineering has shifted from a core value driver to a supporting tool, prompting firms to increasingly focus on operational improvements within portfolio companies. Indeed, top-line growth and margin expansion are the key areas of value creation today, with revenue growth accounting for roughly 54% of value creation for deals that saw exits between 2017 and 2024. This dynamic can be attributed to the role of revenue growth as a sustainable and longer-term source of value creation, as it supports revenue base expansion, enables EBITDA growth, and facilitates more favorable valuation outcomes.

To drive both growth and profitability, private equity firms deploy a range of operational initiatives, including cost transformation, pricing optimization, technology integration, and supply chain improvements. While studies show that operations and pricing are the most effective levers in value creation playbooks, it is important to remember that execution is just as important as planning. To that point, a recent study found that more than half of executives cited poor implementation as a primary and controllable cause of underperformance of their businesses. Ultimately, as operational improvements become more crucial to value creation, private equity firms that can execute with discipline, particularly across revenue growth and margin expansion, will differentiate themselves when it comes to delivering returns and building more resilient and scalable businesses.