It turns out that the zombie virus from AMC’s The Walking Dead is infecting the capital markets. Yeah that’s right, I’m going to get even nerdier in this article. So sit back, strap yourself in as I prepare you for the equivalent of a nerd’s wet dream.
I love hearing about fringe businesses or fringe investments. I call them fringe, not that they actually are by Webster’s definition, but because I hardly ever hear about them. An example of a fringe business is Shelf Corporations or Shelf Companies, not Shell, Shelf. Never heard of it? Good. If you had then this article would be even more boring than it already may be. I’ll write about Shelf Corporations a little later, I know you can’t wait!
Another fringe capital investment I just heard about was Zombie Funds!
Sounds interesting, and they actually are as interesting as they sound, if your a nerd. According to a Wall Street Journal article by Susan Pulliam, Zombie Fund’s are a group of investments that a private equity fund makes. Usually these “investments” means the private equity fund buys a group of businesses, restructures it (this may mean a multitude of things), and then the group of business get sold after a number of years, maybe 10 or so says Ms. Pulliam. Some funds however get stuck with their businesses as they are sometimes hard to sell. The question then becomes, after 10 years of not being able to sell the businesses, when will they sell them? Often times the answer is: never. Hence the term Zombie. They are alive but dead at the same time.
You may be wondering why this matters, especially if you’re not one of the multi-million dollar investors into these private equity firms. Well it does matter to you, especially if you’re ever a teacher, firefighter, or any number of public service employee that has their pensions tied up in private equity firms with these dark market Zombie funds. Even the name sounds devious and makes me want to run for my life. AHHH!
On a serious note, it does matter. Here’s why:
According to Ms. Pulliam these zombie funds charge management fees on the investor. These fees over time add up and can cost the pension fund managers who invest in these private equity funds a LOT of MONEY! The shtick is this, the pension fund managers pay these management fees to the private equity firm without reaping any profit so essentially they’re losing money hand over fist. Why does either business stick with this you might ask? It’s essentially a wild west shootout that has resulted into a stalemate.
I know what you’re thinking now, Clint Eastwood sits behind a tipped over wagon reloading his revolver. John Wayne sits on the opposite side of town behind a candy shop reloading his shotgun. Neither one wants to step out and the only commotion going on is a dust weed rolling through the central part of town. Clint Eastwood is the pension fund manager, John Wayne is the private equity fund.
If you didn’t catch the whole meaning of that, they’re both not wanting to move. According to Ms. Pulliam, the pension fund manager doesn’t want to recognize the value of these businesses at the rate they can actually sell them at, this would require them to record a loss. The private equity firm doesn’t want to sell these businesses off because it would require them to record a loss. Nobody wants to lose. Clint Eastwood doesn’t want to kill John Wayne, what if he dies? Then there would have been no Dirty Harry’s and who wants that?
Anyways, check out the article on Wall Street Journal and theirs a 3 minute video (posted below) if you don’t want to read the article. I’ll try and post some more of these fringe business ideas if you enjoyed the nerd mobile ride. Post your comments and send me your questions. Enjoy!
Hazard For Zombie Funds – WSJ Article