Banks Confront Rising Risk as Private Equity’s Backlog of Unsold Companies Grows

Private equity’s zombie problem is not hiding anymore.

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The growing backlog of unsold private equity companies poses a more serious threat than simply reduced returns for investors. The strain is increasingly moving through the banking system and beyond, turning what began as a private equity challenge into a broader concern for financial institutions and the economy.

Private equity firms have long marketed themselves around a straightforward model: acquire undervalued companies, enhance their performance, and exit at a profit. However, this cycle has stalled across the U.S., with over 4,600 private equity-backed companies remaining unexited for five years or more. General partners now oversee more than $860 billion in buyout value tied up in funds older than seven years, according to PitchBook’s Kyle Walters. These inactive holdings—dubbed “zombies”—are solvent and generating cash flow, but lack viable exit strategies such as sales, IPOs, or refinancing. While not failing outright, they represent a growing liability carried by banks rather than solely by limited partners.

The Fed Is Monitoring Bank Responses

The clearest indicator of mounting pressure lies not in private equity metrics, but in shifting lending practices among banks. According to research from the Federal Reserve Bank of Boston, banks typically hold senior secured positions in business development companies (BDCs), positioning them to recover funds first during periods of stress. While the Fed concludes that direct losses are unlikely to threaten bank stability, it notes a concerning trend: major and regional banks are tightening credit terms extended to nonbank lenders and private equity firms, including stricter controls on loan sizes, durations, risk premiums, and collateral requirements.

This shift reflects growing regulatory awareness that private equity’s exit delays and private credit’s maturity concentrations are no longer just industry discussion topics—they have become supervisory priorities. Banking regulators and risk committees aren’t implementing broad changes based on hypothetical risks; they’re responding to scenarios they view as imminent enough to address proactively, well ahead of the anticipated 2028 maturity wave.

Banks aren’t the sole institutions vulnerable to declining private equity performance. Pension funds, university endowments, insurers, and retail investors have all committed capital to buyout funds and now face similar exposure to these aging, illiquid assets. This report zeroes in on banks due to the risk of contagion. When other entities absorb weakened private equity returns, the impact tends to remain contained. But when banks experience losses, those effects ripple through the entire credit system, restricting lending activity far beyond the private markets.

Inside the Lifecycle of a Zombie Portfolio

In PitchBook’s definition, a zombie portfolio company remains financially stable and profitable, having surpassed private equity’s conventional five-to-seven-year holding period without securing a favorable exit. Many of these firms were acquired between 2018 and 2022, frequently at elevated valuations and using low-interest-rate debt that is no longer readily available. Today’s refinancing landscape offers less attractive terms, while traditional exit channels—strategic acquirers, public offerings, secondary buyouts—have not regained sufficient momentum or pricing power to meet investor return expectations. Consequently, a widening discrepancy has emerged between current market valuations and the internal valuations maintained by fund managers.

Scale Amplifies Long-Standing Concerns

Bain & Company’s latest Global Private Equity Report echoes similar concerns, estimating the worldwide backlog of unsold companies at approximately 31,000 firms valued at $3.7 trillion—an uptick from previous years and marking the third year of consecutive growth. Average holding periods have extended to roughly seven years, with distributions to investors hovering below 15% of net asset value for four consecutive years. Specific cases underscore the issue: Thoma Bravo has struggled to divest analytics company J.D. Power or software provider ConnectWise at acceptable valuations, while Roark Capital has delayed a planned IPO for Inspire Brands, parent company of Dunkin’.

Despite these trends, some analysts remain cautiously optimistic. Goldman Sachs CFO Denis Coleman recently noted improving deal activity, suggesting that larger transactions may soon gain traction. Others argue that portions of the backlog stem from poor preparation or weak financial storytelling by sellers. Even among the more hopeful voices, however, few dispute the existence of the inventory crisis—only its potential resolution timeline.

Private Credit Bears the Brunt of the Freeze

The absence of exits extends beyond equity holders—it disrupts the primary source of revenue for private credit providers: leveraged buyout financing. With fewer exits occurring, business development companies (BDCs) and direct lenders face shrinking opportunities to initiate new deals, leading many to retain older, lower-yielding loans for extended durations. This situation compounds another looming risk: a steepening maturity cliff concentrated in 2028 and 2029.

Nearly $65 billion in non-software BDC loans mature in 2028, rising to $67 billion in 2029, according to PitchBook. Broader leveraged loan and high-yield obligations tracked by firms like Apollo approach $1.1 trillion over the same two-year span. Moody’s has highlighted particular risks facing BDCs with significant software and technology exposure, citing challenges related to inflation and rapid advancements in artificial intelligence that could erode borrower cash flows. Data from Octus reveals early signs of stress, with over $3 billion in non-performing loans maturing through 2027.

Some experts argue the maturity wall isn’t as daunting as projected. An analysis by Reuters of SEC filings from 74 BDCs showed only $15 billion of an $84 billion portfolio set to mature this year, easing immediate concerns. Critics also emphasize that sponsor-backed loans are frequently restructured, enlarged, or rolled forward, diluting the perceived severity of upcoming deadlines.

Looking Ahead: Liquidity Constraints or Systemic Risks?

PitchBook projects a most probable outcome characterized by diminished liquidity and subpar returns as the backlog gradually unwinds through mechanisms such as GP-led secondaries, continuation vehicles, and net-asset-value-backed lending—rather than traditional asset sales. Still, this optimistic projection assumes no additional shocks occur. Should deteriorating credit conditions or slowing earnings coincide with the 2028–2029 maturity surge, today’s measured delays and modest distribution shortfalls could evolve into tangible defaults.

Given evolving lending behaviors, banks appear unwilling to accept such downside risks.

Congressional Testimonies By This Author

Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities

Strengthening Accountability at the Federal Reserve: Lessons and Opportunities for Reform

A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences

Addressing Climate as a Systemic Risk: The Need to Build Resilience within Our Banking and Financial System

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