Happy Thursday and welcome. A lot of new readers here, so if you missed part 1, you can find it here.
And as always, let’s get straight to business.
🧟♂️ Zombie Funds, Part II - Why GP-Led Secondaries Became the Escape Hatch
In part I, I talked about the core problem: when a GP can't raise the next fund, incentives die long before the portfolio does.
Carry disappears.
The ambitious talent leaves.
And LPs end up with a manager who is structurally misaligned with the outcome we all want: timely, thoughtful exits that maximise value.
For a long time, LPs were stuck with this. But over the past decade, a new path emerged - not perfect, but vastly better than the old options.
4. The Modern Fix: Resetting Incentives Through a GP-Led Secondary…
The rise of GP-led secondaries fundamentally changed the equation.
Instead of forcing LPs to monitor their way through five more years of misaligned behaviour, the entire portfolio can be moved into a new structure:
LPs who want liquidity can take it.
LPs who believe in the assets (and the manager) can roll.
The GP gets new carry, which magically restores ambition.
The portfolio gets new capital, new timelines, and new energy.
Valuations get a clean reset, clearing past sins.
A note on human costs
It's worth remembering who else gets stuck when a fund zombifies: the employees at those portfolio companies. They're working at businesses that can't get capital for new initiatives, can't attract top talent because the cap table is frozen, and can't pursue opportunities because the GP has mentally moved on.
A GP-led secondary unsticks them too. New capital flows. The GP re-engages. The company can move forward instead of treading water.Yes, this does reward bad performance.
But, it's not about "rewarding bad behaviour."
It's about recognizing that incentives drive outcomes - and without a reset, the default outcome is a boat with a bad rudder.
But make no mistake, this is deeply unsatisfying and emotionally frustrating for LPs:
"This GP shouldn't get another bite at the apple."
True.
But the question isn't our LP feelings or whether they deserve it.
As fiduciaries, the question is whether the reset produces a better financial outcome.
And in most zombie-fund cases, it does.
… but it won’t work for all cases (probably far from it)
This only works if a secondary buyer actually wants to back this GP.
And many won't.
If the portfolio is truly weak, if the GP burned too much credibility, or if the track record suggests they got lucky once but can't repeat it - no sophisticated secondary buyer is writing that check.
GP-led secondaries aren't available to every zombie fund. They're only available to GPs who:
Still have a defensible portfolio with real upside
Can convince experienced secondary investors they're worth another shot
So while GP-led secondaries fundamentally changed the game, they didn't solve the problem for everyone. They just gave the salvageable zombies an exit ramp.
For the truly troubled funds? You're still stuck with the old options: wait it out, or sell your LP stake at a painful discount to someone who’s willing to take on the risk.
5. Why It's Often the Rational Choice
Consider the alternative:
a GP with no upside
a weakened team
slow or stalled exits
companies getting less attention than they should
and LPs spending valuable time monitoring a manager who has moved from builder to caretaker
It's not hard to see why the secondary reset wins.
A continuation vehicle isn't a gift - it's a way to put real incentives back into the system. And once those incentives return, everything downstream tends to improve: portfolio governance, CEO engagement, operational push, exit creativity.
LPs who want out leave cleanly.
Those who see upside can stay with eyes open.
And the GP gets one last chance - but now they have to earn it.
/ Self-promotion
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