Zombie Companies Are Eating Your Portfolio — The Undead Truth About Private Equity

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Chris sounds the alarm on CNBC’s “confession” that private equity is drowning in zombie companies — firms that can’t grow, can’t die, and are dragging portfolios down with them. He breaks down how cheap-money madness and Wall Street greed created a trillion dollars in walking-dead investments, now haunting pensions, 401(k)s, and private funds. From “ethical bypass at birth” fund managers to the coming reckoning for America’s financial elite, Chris explains why you don’t want to be the next “greater fool.”

Episode Transcript

Speaker 1 (00:00):
The Watchdog on Wall Street podcast explaining the news coming
out of the complex worlds of finance, economics, and politics
and the impact it we'll have on everyday Americans. Author,
investment banker, consumer advocate, analyst, and trader Chris Markowski.

Speaker 2 (00:16):
Zombies attack your poorfolio. I saw this story today and
CNBC and I think I don't even think that they
really realize what they wrote. It was basically a confession.
It really was when it comes to what's happening out

(00:38):
there when it comes to private equity and what they're
doing in the zombie companies and stuff that we've been
talking about for a long time. I got to go
through this article piece by piece, and this is pretty
important people. It's pretty important. Again, we've warned you over
the past thirty years just about every colann that's been

(01:01):
out there. This is another one. Private equity firms are
facing a new reality, a growing crop of companies that
can neither thrive nor die, lingering in portfolios like the undead.
These so called zombie companies refer to businesses that aren't growing,

(01:21):
barely generate enough cash to service debt, and are unable
to attract buyers even at a discount. They're usually trapped
on a funds balance sheet beyond it's expected holding period.
Now trapped. Yeah, the people that are running the private
equity fund, they're still getting paid on that asset. Let's

(01:44):
just make that perfectly clear. As interest rates for rising,
people felt they were stuck with businesses that were slightly worthless,
but they couldn't really sell them. So you're in this
awful situation where people throw around the word zombie companies.
This is actually coming from a founding partner of a
private investment firm, Searchlight Capital. They're upset. They're upset because again,

(02:09):
they borrowed a ton of money when rates are really low,
and they just were throwing it around, throwing it around.
Why were they doing that? Why were they offering ridiculous
multiple money was cheap, and the hope was to flip
these companies onto a greater fool, another sucker again, going

(02:31):
back to what we'd like to call the demonic game
of musical chairs. Okay, these companies don't have enough cash
flow because of the rising interest rates to keep investing
in growth. There are no potential buyers for these companies,
and that's really a big challenge for our whole industry.
This guy's basically saying, we can't find suckers right now.

(02:56):
We're having a difficult time. Again, what are they trying
to do right now? What is their escape? You? You
and your four to one k. Yeah, all these all
these funds popping up, Oh, you can invest in private equity,

(03:17):
you can invest and the alternative investments, and they're going
to market the crap out of these things. Don't touch it. Traditionally,
PE firms could write out downturns, refinance debt, and sell
when markets rebounded, but industry veterans warn that today's freeze
appears to be lasting longer. Private equity firms are having

(03:40):
difficulties because the machine is stuck. If you don't distribute back,
you don't get limited partners in a position where they
have liquidity to commit new funds. So it's problematic. What
they're saying is the limited partners, which are the investors
in these private equity companies, can't get their money out

(04:02):
and they want to rotate those assets. This is the
This is how the game is played. Do you understand?
This is how it's played with these people that have
again they've had an ethical bypass at birth. They have
no qualms whatsoever, none whatsoever, of laddering companies up over

(04:23):
a period of time, dumping them on some greater fool
out there and rinse and repeat again again. You don't
have to play this game, you know. And I'm actually
looking forward to be honest, you looking forward to having

(04:44):
I mean, hopefully.

Speaker 1 (04:45):
It's the case.

Speaker 2 (04:46):
These people getting there, you know, their asses handed to
them quite frankly. But who knows, who knows you could
they might get a bailout, because you know, that's how
we run things here in this country. We've got a
lot of you know, socialism for rich people. Anyway. The
log jam echoes the aftermath of the two thousand and

(05:06):
eight financial crisis, when stale portfolios and refinancing cliffs clogged
the market. According to accounting firm PwC, private equity firms
are sitting at about one trillion in unsold assets that
would typically have been exited under a normal cycle. The
average holding period for pe portfolio companies reached its longest

(05:30):
on record at five point six years. What's more, an
increasing number of private equity investors say they're capital is
trapped in zombie funds. YEP. Nearly a half of institutional respondents,
including pension funds and insurers, report exposure vehicles unlikely to
exit assets or secure fresh commitments. Again, a lot of

(05:51):
pension funds in this crap too. Oh yeah, they're having
a real difficult time. Basically, the article goes on and
on and on and talking about how all of these
these private equity firms they don't want to take any losses.
They don't want to take any losses on this because

(06:12):
it's bad for marketing. Liquidating a failed investment locks in
a realized losses that hurt fun performance and jeopardize future fundraising,
giving firms strong incentive to kick the can down the road.
Plus again, they can hold on to it and still
collect their fees. It's easier to keep the corpse politely

(06:32):
seated at the board table than to host a funeral
that invites post mortems. They're actually admitting to this crap.
The reputational dent is just as punishing. Liquidation signals not
just a bad investment call, but an inability to rescue it.

(06:52):
I want to go back in time a little bit.
This is a column I wrote back in June of
twenty twenty two. Okay, reality of the terrain and fundamental
review talking about things that investors need to look for.
One of them read a part of it. Aware of zombies.
When buying companies for one's portfolio is very important to

(07:15):
look out for zombies. There are two different types of
zombie companies on the prow The first are the slow
moving variety zombie businesses that exist due to a myriad
of reasons such as regulatory capture, incestuous management, and business
plans at serve management not shareholders. Telltale signs of these
companies are outside stock compensation packages that lead to stock

(07:37):
buybacks rather than capital expenditures. The board of directors for
these companies is an incestuous mix of ex politicians and
executives and CEOs of other companies. If you are not
growing your business, you're dying. If a company's not investing
via capital expenditures, it's a zombie. Even though these businesses
are slowly but surely deteriorating, they stay afloat via their

(07:58):
connections on Why Washington and Wall Street. The other type
of zombie, the grow at all costs earnings don't matter variety.
These companies exist during periods of easy money and all
out bull markets. These zombies feast on venture dollars for
as long as they possibly can before going public, to

(08:19):
then seek out the greater fools that will take the
insiders and venture funds out. These zombies are built up,
often through clever marketing. These companies are created and developed
all in accordance with getting the insiders out, not about
long term sustainable business models. These zombies can often be
described as great concept, terrible business. Don't say I haven't

(08:47):
warned you, watch dog on Wallstreet dot com