If you believe McKinsey’s count — sixteen thousand companies in the global private equity exit queue, 52% of buyout-backed inventory, the highest on record — you should be starting to believe the rules of the exit have changed.
That’s a lot of houses on the market. Not for lack of interest, and not because the door is broken. Buyers got choosier. Lenders got sharper. The exit window narrowed because the people on the other side of it learned what to look for.
The dashboards look OK-ish
There’s a name for what most of the queue actually is. A zombie company — borrowed from financial press, where it originally described Japanese companies kept alive by patient debt — works just as well in the PE-backed software world. A zombie isn’t a failed company. It’s metric-alive and structurally unsellable.
Revenue’s positive. EBITDA is technically up. The team is still in their chairs. The dashboards look OK-ish depending on the quarter.
But the operating model is held together with promises, capability bolt-ons, and a cross-sell story that didn’t materialize. The CEO knows. The PE firm half-knows. The next buyer’s diligence team will know within ninety days.
Most of the sixteen thousand are zombies. Not all — but enough that the buy side is now leading every conversation with the assumption.
Lazy financial engineering used to work
Add an acquisition. Tell the story. Fold three CRMs into one. Count the headcount cut. Mark the multiple up. Sell the bigger story. Repeat.
It worked because cheap debt and expanding multiples gave the model margin for error. Both are gone. The last two years have settled that.
What replaced the easy money is sophistication on the other side of the table. Lenders now read covenant math against actual coverage, not modeled coverage. Buyers send operational diligence teams that don’t stop at the financial statements. Both are spotting the same thing: the Jenga blocks.
Every PE-backed software company has them. The acquisition that was bolted on without a function owner. Three quote-to-cash systems folded into “one” that still requires four humans to reconcile. The headcount cut that left a function running on tribal knowledge. The margin gain that came from deferring work, not improving it.
Each block is a structural shortcut. Stack enough of them, and the company holds — until it doesn’t.
Jenga blocks eventually wobble. The integration that was never finished. The system that doesn’t talk to the system next to it. The function that “owns” something nobody can name.
Here is the thing the new buyers and the new lenders have figured out: financial engineering is not a substitute for operational substance. It looked like one for a decade. It doesn’t anymore.
The fear isn’t being caught
The CEO of a zombie portco knows where the bodies are buried. They wrote the value story. They know which parts are real and which were structured to look right at the exit window.
The fear isn’t being caught. It’s being held.
Held to another year of investor calls explaining the slipping timeline. Held to another talented VP leaving because the strategy keeps “evolving.” Held to another quarter of dashboards that look OK-ish. Held to another all-hands where you say “we’re getting close” for the third time in eighteen months.
The calendar that used to feel full feels like a sentence. The office walls feel a little closer each quarter. There’s a specific 2 a.m. feeling — eyes open, ceiling, doing the math on how many more board cycles you can carry before someone says out loud what everyone is already thinking.
The unspoken part of the sixteen thousand number isn’t that the buyers got tougher. It’s that the CEOs on the other end of that statistic are starting to run out of ways to convince themselves they’re still building something.
The alternative is the boring kind
The reflex move, when an exit slips, is more strategy. Bigger value creation plans. New advisors. Another deck.
That is more stacking. More wobble.
The alternative is operational substance. The boring kind. Six processes — lead to cash, procure to pay, application lifecycle, employee lifecycle, customer lifecycle, corporate governance — running right, with owners who can answer for them on a Tuesday. An operating rhythm where decisions don’t queue at the CEO’s calendar. Function leaders who actually own what they’re called to own.
That isn’t a deck. It isn’t a 100-day plan. It is the work, done inside the company, by someone whose accountability matches the outcome.
It is also what the new buyers can see, when they look. Real operating structure shows up in the diligence room the way a clean kitchen shows up to a health inspector. You can’t fake it twenty minutes before they walk in.
Run your own zombie diligence
Before someone else does it for you.
Spend a day — a whole one — watching someone brave do their job. Tell them the truth: you’re not auditing, you’re not solving, you’re not preparing notes. You’re watching. Sit in the corner and actually watch.
Ask “and then what” a lot. Don’t offer a single “we should.” Not one. The discipline is what the test is measuring as much as anything else — if you can’t sit through a Tuesday without trying to fix it, the diagnosis is already in.
Do it in two or three different functions. Quietly count the wobbles. The integration that’s actually a workaround. The decision that needs four people because the system can’t make it. The handoff that depends on someone remembering.
Trade the time you would have spent on one more strategy discussion for looking your Jenga blocks square in the eye. That is the more useful meeting.
Exit readiness isn’t getting harder.
The market is getting honest.
The companies that built it right exit at the number the model said. The zombies don’t.