Fed Rate Hikes Deepen Private Equity Woes as Zombie Fund Assets Expected to Swell Further
nashnova research
The Fed's rate hike this week pushes private equity exits further out of reach — capital trapped in zombie funds has hit $349 billion, up roughly 65% from end-2021, meaning a growing share of institutional money is locked inside assets that cannot be sold.
What are zombie funds, and why does a rate hike make them grow?
Zombie funds — private equity vehicles past their agreed ten-year life that still cannot sell their assets — held $349 billion at end-2025, up about 65% from end-2021, per PitchBook.
This means → higher rates squeeze from both sides: portfolio companies face steeper borrowing costs and thinner margins, while potential buyers see pricier financing and bid lower. Sellers and buyers can't agree on price, so deals stall.
In plain terms = when rates rise, sellers can't get the price they want, buyers won't pay it — and the fund stays frozen.
Returns at a fourteen-year low — is investor capital stuck?
PE funds delivered an average return of about 7% in 2025, the lowest since 2011, even as the broader U.S. economy kept growing.
This means → pension funds, insurers, and endowments are falling short of their allocation targets, with capital locked inside zombie funds and unable to rotate into better opportunities.
Kroll managing director Mitchell Mansfield warns: the longer a fund lingers, the more returns plateau and then decline — the longer the money sits, the less it earns.
What is going wrong on the fundraising side?
Through September 11, PE firms have raised $211.9 billion this year — on track for the weakest full-year total since 2020.
Full-year 2025 fundraising came in at $334.4 billion, already well below the prior year's $376.9 billion.
This reflects a pickier investor base. Angela Rodell, former CEO of the Alaska Permanent Fund, says allocators will now "only re-up with specific relationships they have confidence in" — and more PE firms will shut down as a result.
Are even the industry giants feeling the strain?
Apollo (APO) co-president Scott Kleinman said plainly: manager count will shrink, and some firms that expanded rapidly over the past decade may have to scale back.
Since the start of this month, shares of Apollo, Blackstone (BX), and KKR have dropped noticeably as rate-hike expectations climbed.
In plain terms = when even the biggest names see their stocks slide, the market is casting a vote of no confidence on the entire PE sector's near-term outlook.
When does this cycle of pain end?
Lowenstein Sandler partner Sara Werner argues it is "absurd" to say PE's golden age is gone forever, because markets are cyclical.
The real question is: how long can these funds afford to wait for the valuations they need?
This means → when rates peak and the exit window reopens will determine how deep this contraction runs — until then, the zombie fund pile only grows.
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