No, not the rancid, brain-devouring living dead of horror movies—we’re talking about zombie portfolio companies, which have been proliferating across the $3.8 trillion private equity industry. Consider these numbers: Among the 13,509 companies backed by U.S. PE firms, about 33.8% have been held for five years or more, according to new PitchBook data. This means there are north of 4,500 PE-backed companies in some zombie stage right now, which shakes out to a wild number: There’s about $860 billion in zombified net asset value in U.S. PE, among funds that are more than seven years old, PitchBook estimates. 

There are many kinds of zombies. By age, for one: At five years, the zombie company is already feverish, and at ten years, it’s a full-fledged hungry zombie. There are also distressed zombies, and those that are just surviving, but the general definition of a zombie is clear, Kyle Walters, PitchBook’s private equity analyst, told Fortune.

“You have a large number of companies that theoretically should’ve been exited by now,” said Walters. “Capital should have been returned to investors, but instead you have more companies in that seven to ten year-age bucket than we’re traditionally used to, with seemingly no way of realizing a successful exit. And so, we’re stuck with these zombies.”

The zombie problem dates back to the ZIRP (zero-interest-rate-policy) era, when debt was mega-cheap, capital was flowing, and the private markets got themselves into some exuberant trouble. In PE, especially, cheap debt fueled a buyout boom.

“Post-COVID in 2023, when you get rates going to their highest in 40 years, you’re no longer able to rely on that financial engineering,” said Walters. “So, when that comes, not only have you bought these companies at the 2020-2021 peak, when valuations were at their highest and capital was next to nothing, you have to create operational improvements when it’s hardest to do so. Pair that with companies that were bought at 12x, and are maybe worth 10x, and you’ve dug yourself a bit of a hole, and there’s no real way to get out.”

Walters says that while this is hindering growth in private equity—pretty tough to raise a new fund when your current portfolio looks like The Walking Dead—we haven’t hit the place where this is a systemic failure. I asked: How will we know if it does reach a structural crisis?

“I think you really need to kind of have multiple layers,” said Walters. “Once you have this existing layer of zombies, on top of that, you need to have some other factor of risk…. I think that’s when you’ll start to see breaking points. You need larger triggers to really see action forced with the private markets. GPs have the advantage of timing to a large degree, unless their hand is forced, which historically isn’t the case with private markets.”

Indeed, the private markets (and especially PE) are quite adept at kicking the can down the road, so this all may never reach an apocalyptic fever pitch. Still, I asked Gemini: What’s the natural endpoint of any zombie crisis? 

The answer, edited for space, goes something like this: “The natural endpoint of a zombie crisis is total biological collapse. Without a living host metabolism to repair tissue, maintain cellular function, or evade environmental elements, the infected population inevitably succumbs to complete physical decomposition, weather mummification, or consumption by scavengers within weeks or months. Most users on Reddit agree that biological decay acts as the ultimate limiting factor for any reanimated or infected horde.”

I read this aloud to Walters, who takes the somewhat optimistic approach that the natural cycle will lead to long-awaited exits: 

“Private equity is very good at timing the market,” he said. “It’s going to take time, but I think you’ll see what we see in life generally: The strong come in and take advantage of the weak. Some of these platform companies will come in, and say: ‘hey, we know this is a zombie company, but it’d be a great addition to our platform.’ And the zombie achieves the final exit, even if it took longer than originally thought.”

I was more morbid, figuring: The same way biological decay limits any zombie horde, it will also limit the private equity zombie horde, and many of these companies will just… die, go bankrupt, wind down. Walters reckons it will be some combination of both our interpretations.

“These companies can’t sit in the portfolio forever,” he said. “They have to decay in one way or another. There is always an outcome—one is better than the other—but it’s inevitable.”

See you tomorrow,

Allie Garfinkle
X: @agarfinks
Email: alexandra.garfinkle@fortune.com

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VENTURE CAPITAL

- Quintessent, a Santa Barbara, Calif.-based developer of optical interconnect products for AI data centers, raised $40 million in a Series A funding. Cycle Capital led the round and was joined by others.

- Airbound, a Bengaluru, India-based drone delivery company, raised $37 million in Series A funding. Greenoaks led the round and was joined by DoorDash, Lightspeed, Lachy Groom, and Humba Ventures.

- Hivemind Digital Group, a New York City-based investment firm focused on digital assets and blockchain technology, raised $17 million in funding. M&G Investments led the round and was joined by CPIC Investment Management, ZA Bank, and others.

- Kazimi, a Berlin, Germany-based mobile-app cybersecurity company, raised $2.6 million in pre-seed funding. Market One led the round and was joined by IBB Ventures and angel investors.

- Itoflow, a London, U.K.-based AI-powered portfolio-management platform for investment teams, raised $2.5 million in pre-seed funding. Balderton Capital led the round and was joined by angel investors.

PRIVATE EQUITY

- ATIS, a portfolio company of Thompson Street Capital Partners, acquired AuditMate, a San Francisco-based elevator asset-management software company. Financial terms were not disclosed.

- Rotunda Capital Partners acquired Revv, a New York City-based ADAS repair-workflow software company, and plans to merge it with its existing portfolio company AirPro Diagnostics. Financial terms were not disclosed.

EXITS

- Linden Capital Partners acquired ArtesRx, a Chicago, Ill.-based specialty pharmacy platform, from Flexpoint Ford. Financial terms were not disclosed.

OTHERS

- Descartes acquired Tai, a Huntington Beach, Calif.-based transportation-management software provider for freight brokers, for approximately $100 million.