Engineering Liquidity from Zombie Private Equity Assets

Introduction

The private equity industry is now confronting one of the largest structural liquidity challenges in its history: the emergence of a vast inventory of “zombie” assets—portfolio companies that are fundamentally stable but lack meaningful growth, clear exit paths, or credible valuation catalysts. Traditionally, secondary buyers were attracted by imminent exits: IPO pipelines, robust M&A interest, or strong forward projections. In today’s environment, however, many companies purchased at peak valuations between 2018 and 2022 are now worth less on a mark-to-market basis than their acquisition price. The usual levers—multiple expansion, rapid revenue growth, or strategic buyer premiums—no longer reliably apply.

This summarizes how how private equity sponsors can manufacture attractiveness where organic catalysts do not exist. When a company cannot be sold, sponsors must learn to sell the rights, structures, preferences, optionality, and economics surrounding the company. Value must be engineered, not discovered.

I. The Core Challenge: Why Zombie Assets Are Hard to Sell

Zombie assets share three characteristics:

• No imminent IPO or public-market demand.

• Limited strategic buyer interest, often due to scale, integration complexity, or industry stagnation.

• EBITDA that is stable, but not growing, eliminating the narrative of multiple expansion.

This leaves sponsors holding assets affected by the ‘denial premium’—a valuation anchored to the entry price, not to today’s market reality. LPs remain trapped, unable to redeploy capital, while GPs face pressure to generate DPI but find themselves unable to consummate traditional exits. As a result, secondaries become the only practical pathway—but secondary buyers will not purchase traditional equity in a no-growth environment unless the structure compensates them for lack of upside.

II. Strategic Reframing: From Growth Equity to Engineered Yield

The fundamental shift required is conceptual: secondaries must be offered a yield-driven, credit-like, or option-enhanced return profile. In the absence of growth, the equity must be transformed into a security whose return does not depend on expansion. That is the philosophical foundation for all liquidity solutions that follow.

III. Structuring Solutions for Attracting Secondary Buyers

1. Transform Equity into a Yield Instrument (Preferred Equity Recapitalization)

If an asset lacks growth, the cash flows become the asset. Sponsors can recast common equity into a structured preferred instrument:

• 8–14% preferred yield (cash-pay, PIK, or hybrid).

• 1.0x–1.5x liquidation preference.

• Optional step-up in rate after 36–48 months to pressure the sponsor to exit.

This turns a ‘value trap equity stake’ into a predictable-income investment. It becomes underwritable by:

• Private credit funds

• Yield-focused secondaries

• Insurance balance sheets

• Family offices seeking stabilized cash flow

By shifting the frame from ‘future upside’ to ‘current yield,’ the investor base expands dramatically.

2. Operational Turnaround Earnouts (Engineered Value Creation)

If revenues cannot grow, value must come from margins, balance sheet efficiency, or operating leverage. Sponsors can structure:

• SG&A reduction-based earnouts.

• Margin-improvement milestones.

• KPIs for plant consolidation, procurement renegotiation, SKU rationalization, etc.

A secondary buyer may find the investment attractive if they believe they can *force* improvements operationally. This aligns especially well with operationally intensive secondaries and activist-style PE funds.

3. Control and Control-Lite Recapitalizations

A stagnant business becomes materially more interesting once a buyer can seize the steering wheel. Structures include:

• 55–70% majority sale.

• Board control, even without majority economics.

• Negative control rights (vetoes on key operational and financial decisions).

• Performance-based call options granting additional ownership.

This reframes the deal as a ‘fix it and flip it’ story rather than an ‘own it and pray’ story.

4. Sponsor-Provided Seller Financing (IRR Enhancement Through Leverage)

When growth is limited, IRR must be engineered. Seller financing has outsized impact:

• Buyer pays 50–70% cash at close; remainder via 10–12% subordinated seller note.

• Seller note is deeply subordinated to attract credit-focused co-investors.

• Option: Convert note to preferred equity after default.

This boosts buyer return even if EBITDA never expands.

5. PropCo / OpCo / IP Co Decomposition (Monetizing Hidden Asset Classes)

Many zombie companies own valuable assets no one has monetized:

• Real estate (PropCo).

• Intellectual property—patents, designs, data (IPco).

• Equipment (equipment leasing SPVs).

By carving stable assets into a yield vehicle (PropCo/IPco) and selling that to a secondary buyer, sponsors can unlock capital while retaining operational control of the OpCo. This significantly widens the buyer pool and de-risks the capital structure.

IV. Packaging the Deal to Maximize Investor Appeal

6. Valuation Reset (Removing the Denial Premium)

Most secondary processes fail not due to asset quality, but due to sponsor reluctance to accept a valuation reset. A realistic re-marking of the asset to reflect today’s multiples produces a new narrative:

‘You are not buying a zombie—you are first money into a dramatically repriced opportunity.’

This is crucial because secondaries buy *basis*, not history.

7. Synthetic IPO Return Features (Creating Optionality Out of Thin Air)

If an IPO is off the table, sponsors can create synthetic upside:

• Ratchets granting additional equity if targets are met.

• Warrants tied to EBITDA, FCF, or revenue milestones.

• Minimum-value exit rights triggered after 5–7 years.

These structures create an equity options package where none exists organically.

8. Preferred Return + Equity Kicker (Classic Downside Protection)

A blended return profile is one of the most attractive structures in the secondary market:

• 10–14% preferred yield.

• 1–3x liquidation preference.

• 5–20% equity kicker.

Buyers get a safety-first structure with upside if the turnaround surprises to the upside.

9. Convert the Asset to Private Credit (Non-Equity Liquidity Path)

Sponsors can refinance the asset entirely with a private credit fund. Proceeds repay LPs via a partial or complete secondary process. The credit fund then underwrites the business as a yield-generating loan rather than a growth-equity investment. This provides liquidity without forcing an equity sale.

V. Portfolio-Level & Fund-Level Liquidity Solutions

10. Bundle a Zombie Asset with High Performers (Portfolio Strip Sale)

A single stagnant asset may be unappealing, but a 3- or 5-asset strip sale with blended performance becomes highly attractive. This approach smooths risk and enables sponsors to exit underperformers alongside stronger companies. Secondary buyers often prefer diversified exposures.

11. Continuation Funds with Third-Party Lead Investors

Continuation funds allow GPs to:

• Re-set valuation.

• Re-underwrite the asset with fresh capital.

• Bring in a lead secondary fund to validate the mark.

• Offer LPs cash-out or roll-forward options.

This transforms a dead-end asset into a newly capitalized investment thesis.

12. GP Commitment Increases (Signaling Theory in Action)

When the GP meaningfully increases their commitment, buying LPs interpret it as a powerful signal of alignment and belief. In situations where assets lack growth, trust and alignment become central to investor psychology.

VI. Creative and Non-Traditional Liquidity Innovations

13. Tokenized Revenue Streams or Royalty Securitizations

Sponsors can tokenize future revenue streams or royalties and sell them to fintech-oriented capital pools. This taps new investors outside traditional PE and secondary markets, converting illiquid claims into yield instruments.

14. Revenue-Based Royalty Secondaries

A buyer receives 2–6% of revenue until achieving a 1.5–2.0x return. Equity remains with the existing fund. This structure converts stagnant equity into predictable cash flow.

15. Insurance-Wrapped Structures

Using specialized insurance products—credit insurance, performance insurance, or parametric revenue insurance—sponsors can transform equity risk into partially insured, yield-focused risk. A wide range of institutional investors only participate once downside protection exists.

VII. What LPs Truly Value in Zombie-Asset Secondaries

For LPs to accept a secondary in a zombie-asset scenario, the structure must deliver at least one of the following:

• Liquidity now.

• Visible downside protection.

• Preferred yield.

• Optionality for unexpected upside.

• Some degree of control by a competent operator.

• A path to exit within 3–5 years.

• A valuation they can defend to their investment committees.

The strategies outlined above collectively satisfy these criteria through engineered economic structures rather than operational miracles.

Conclusion

Zombie assets do not inherently lack value—they simply lack catalysts. Through creative structuring, valuation realism, financial engineering, control transfers, synthetic optionality, and nontraditional revenue securitization, sponsors can transform trapped equity into institutionally attractive instruments.

This toolkit provides additional opportunities to unlock capital even when growth is absent, exits are stalled, and traditional narratives fail. When a company cannot be sold, the *rights* and *economics* surrounding the company maybe still can.