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Investment Zombies

July 15, 2013

Financial News: “Investors seek ways of dealing with ‘zombies’” by Alec Macfarlane:

Investors face an uneasy situation when attempting to deal with the so-called zombies in private equity.

Zombies are private equity firms that have run out of money to invest and have little prospect of raising a new fund, while their existing fund is typically struggling to make a profit. But they continue to operate…

and

Financial News lists five options open to investors to deal with zombie firms.

1. Reset the carry
2. Fund recapitalisations
3. Secondary sale
4. Change the team
5. Do nothing

With “zombie” quotes from:

zombie billy gilmore swipzombie klaus Rühne ruhne atp equityzombie graeme gunn capital

Billy Gilmore, head of private equity at Scottish Widows Investment Partnership, said: “The reason for the fund being a zombie fund is that the general partner in question is unlikely to raise a successor fund. Is it appropriate to reward them for that failure?”

Klaus Rühne, a partner at ATP Private Equity Partners, said investors sometimes have different agendas, which can cause problems. He said: “Some don’t want a secondary sale, some would love it. In a zombie fund, you may have secondary investors that came in at year 10. They obviously have a different agenda to the primary investor that came in in year one.”

[and]

Graeme Gunn, a partner at investor SL Capital Partners… Gunn said: “The biggest issue you face if you’re trying to affect change is investor apathy. If a fund’s got 100 investors, usually you need to bring along 75% by value, so you need to get 20-plus investors aligned. There have been situations where we wanted to make a change but we just couldn’t find the investors. It’s the greatest advantage that the general partners have when they’re in that zombie situation. We find that very frustrating. That’s ultimately why there haven’t been that many cases [of investors taking action].”

Meanwhile at The Telegraph: “What to do with ‘zombie’ pension plans” by Richard Evans:

One of the problems is that many of the pension companies keen to take your business a couple of decades ago have all but ceased – these “zombie” life insurers are closed to new customers and stay in business merely to run down existing savers’ pots. They have no incentive to keep costs down or deliver decent investment growth.

At ThisIsMoney: “Zombie insurance firm Phoenix in talks with Swiss Re over £3bn merger with giant insurer’s closed life fund” by Rob Davies, mentions

“zombie tycoon Clive Cowdery”

zombie clive cowdery

And in The Economist print edition: “Blight of the living dead” referring to “credit corpses” and explaining:

Europe’s financial system is in a terrible state, and nothing much is being done about it … Banks are central to Europe’s prospects. The fear, especially in peripheral economies, is a repeat of Japan’s experience in the 1990s, when “zombie” banks staggered along for years, neither healthy enough to lend to firms nor weak enough to collapse. There are the same unvital signs in Europe. … [concluding:] The problem is that now is when the banks are half-dead. Waiting for zombies to come back to life is a fool’s game.

In The Guardian: “Vince Cable warns of ‘zombie companies’ littering UK economy” by Jennifer Rankin:

zombie vince cable business secretary

Britain’s economy is littered with “zombie companies” that are surviving only because of low interest rates and will go bust when economic conditions change,

And last week in Reuters blog, Edward Hadas wrote similarly about the United States “Get used to zombie economics“:

zombie edward hadas reuters

Zombies are neither really alive nor fully dead…. economic zombification receives little attention, its effects could be as important as monetary policy, fiscal deficits and structural reforms. … the zombification of the Japanese population could well be the most dramatic such shift in history, at least during a period of peace, prosperity and good health. Of course, Tokyo and Osaka are not actually filled with walking, flesh-eating corpses. …

The United States has resisted the zombie curse. … Economic zombification does not necessarily make people poorer. … In zombification, the young people who would join the economy if the birth rate were at or above the replacement level go missing. …

That has been happening in Japan and perhaps in Europe. I believe this infrastructure zombification explains as much of the seemingly weak recoveries from the 2008 recession as financial entanglements and poor labour-market policies. In reality, the recoveries are not that weak, adjusted for the zombie effects.

…zombification has only begun.

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From → economics, money

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