Before PE: Founder Obsessed with the Customer. After PE: Manager Obsessed with the Multiples. Forbes just profiled 20 PE “zombie firms.” Firms that can’t raise new funds, can’t sell what they own, and can’t return cash to investors. The surface read is competition. Too many funds, not enough dollars. The deeper read is structural rot that rising rates finally exposed. Every fund that bought between 2019 and 2021 underwrote exits at 3-4% base rates. Rates doubled. That single variable broke the math. But rates didn’t cause the disease. They revealed it. The median PE fund’s outperformance was never about operational genius. It was about debt. Buy a company with mostly borrowed money, ride a rising market, and the equity math looks brilliant. Now three-year PE returns sit at 7.4%. The MSCI World returned over 18% in the same window, according to Cambridge Associates. No lockup. No management fees. No carried interest. You can sell it tomorrow. PE investors can’t sell anything tomorrow. Median DPI for 2020-vintage funds is below 0.2x. For every dollar the median fund received, it has returned less than twenty cents. Distribution yields collapsed from 25% to 11%. Large pensions are pulling back commitments because their cash flow models are broken. And when capital doesn’t come back, they can’t recommit. The flywheel doesn’t slow down. It reverses. So what do trapped fund managers do? They sell portfolio companies to their own continuation vehicles at self-assessed prices, or pass them to another PE fund. Each flip adds leverage, raises the break-even, and narrows the margin of error for whoever holds the bag last. Continuation funds raised $62 billion last year. That sounds like innovation. It’s a fee structure dressed in a prospectus. But the deepest problem is one PE will never fix. Every brand worth buying was built by someone Munger would call a fanatic. Obsessed with the product. Losing sleep over customer problems. That obsession created the value PE paid a premium to acquire. PE’s playbook replaces that obsession with margin optimization. Cut costs. Bolt on acquisitions. Engineer the multiple for a 3-5 year flip. The founder’s mission often walks out the door during the transition plan. What’s left is a company that looks better on a spreadsheet, worse in a customer’s hands, and stuck in strategic limbo with no investment in growth and no long-term plan. Now multiply that across 15,000 firms managing $9 trillion, all chasing the same targets. Every firm pays more for less. Then levers up further trying to hit the 20% returns they promised. This is an industry that was built to profit from inefficiency that became the inefficiency. Zombies don’t die quickly. They shuffle around for years, consuming resources and producing nothing. The investors writing those pension checks are the ones paying for the privilege. https://lnkd.in/eTwr7PNW