Blackstone knows what the characters on The Walking Dead took a couple of seasons to learn: In a zombie apocalypse, you should always have an exit plan.

The investment giant announced blowout earnings on Thursday, driven in part by a healthy rate of private equity exits and realizations. That makes it the envy of the private equity industry, which is contending with a record number of unsellable “zombie funds” that have lived on far past their intended lifespan, per an analysis in The Wall Street Journal.

Lifespan-Maxxing

Blackstone’s secret? Selling the one thing that’s hot: AI infrastructure. In particular, offloading a trio of data center assets last month to Digital Realty Trust for $3.5 billion, enough to drive its real estate division’s highest revenue in four years. The firm netted $31 billion in realizations in the quarter, and $144 billion in the past 12 months. “Our outstanding results are proof of our early, strategic decision to lean into AI, its infrastructure and compute shortage,” President Jonathan Gray said Thursday. Paired with appreciation of other AI investments, the exits helped boost distributable earnings 26% year-over-year to $1.98 billion, or $1.52 per share, blowing past analysts’ expectations of $1.35 per share.

It’s a stark contrast with the stagnation elsewhere in the private equity universe. Frenzied dealmaking in the ultra-low-interest-rate past and overly optimistic valuations are coming back to bite, with buyers now reluctant to pay high prices and, worse, high interest rates. It’s creating a historic bulk of unsellable assets and aging portfolios:

• The industry held an estimated $3.9 trillion of unsold portfolio companies as of last year, according to Preqin data seen by the WSJ, meaning some three-quarters of all North American private equity assets on balance sheets were locked up. The net value of assets stuck in funds at least a decade old is now at a record $348 billion, 100 times as high as the amount in 2005.
• That’s led to funds existing past their intended lifespan, hence the “zombie fund” label. A June survey from Coller Capital found that 54% of firms expect the number of such funds in their portfolios to increase in the next two years.

Is This The Real World? Gray acknowledged one of the reasons for the industry’s struggle: Nobody wants to buy businesses offering software, information or professional services right now. But he also maintained there’s potential for exits outside of the AI world. “If you’re a medical-supply business, if you’re a fast-food chain, people want to own those kinds of businesses … So there is interest in the real world away from the AI trade,” Gray said. Unlike SaaS, french fries never go out of style.

If Sir Isaac Newton had been an ETF investor, his law of gravity would have asserted: What goes up must come down, but will hopefully go right back up again.

After an astronomical run for semiconductors in which the memory sector fund DRAM rose almost 200% after launch, the sector is coming back down to Earth. Some 14 of the 30 companies in the PHLX Semiconductor Sector index have tumbled 20% or more amid concern that the new Chinese artificial intelligence model Kimi K3 will disrupt the AI market in the US as well as worries about the sustainability of spending in the sector more broadly. But despite the dip, investors are still pouring money into semiconductor ETFs, betting on a rebound, said James Seyffart, Bloomberg ETF analyst.

“Theoretically, you should view this as healthy,” said Seyffart. “If you look at the performance of anything, there needs to be some sort of pullback. It’s never really one straight line up.”

Chips and Dips

Chipmaker stocks had a rough weekend after Chinese AI company Moonshot unveiled Kimi K3, an open source AI model that performs comparably to OpenAI and Anthropic’s top models at a fraction of the cost. But this isn’t necessarily cause for alarm, Seyffart said. “These are the types of corrections you expect when things get really bubbly.” Semiconductor ETFs’ recent performance is “obviously not good, but it doesn’t matter because they’ve been taking in money pretty handily across the board, particularly some of the levered long exposures.”

Over the last month, the largest semiconductor ETFs have had steep losses paired with strong inflows:

• The VanEck Semiconductor ETF (SMH) is down 15.3% but has had $2 billion in inflows, according to VettaFi data.
• The iShares Semiconductor ETF (SOXX) slipped 18% but brought in $7.2 billion.
• The Roundhill Memory ETF (DRAM) is down 30.8% but has attracted $10.7 billion in inflows.

Over in leveraged land, inflows typically pick up when products start performing poorly, said Seyffart. The Direxion Daily Semiconductor Bull 3X ETF (SOXL) is down 51% over the past month, but has brought in $2.6 billion in the same period, $1.4 billion of which was in the past five days alone. “People are trying to call a bottom and try to bet on that short-term reversal,” he said.

Banking on Memory’s Future: Semiconductor investment is predicated on the theory that memory will continue to play a major role in the AI buildout. With hyperscaler earnings coming out next week, companies will make capital expenditure projections that could affirm investors’ belief in their semiconductor bet, said David Fetherstonhaugh, an investment strategist at VistaShares. “People want to see that number increasing to get conviction that that money is going to flow proportionately to the right semiconductor companies.”

Remember when gas was under $4 a gallon and you could take the family out to eat without taking out a second mortgage? Ahhh, those were the days.

As the cost of living rises, everyday expenses are eating into retirement savings. Americans currently participating in workplace retirement plans anticipate needing $1.2 million on average to retire comfortably, according to a Schroders survey released this month. However, just 30% believe they will reach $1 million due in large part to rising costs, debt and competing expenses. In fact, a third of those surveyed said they have more credit card debt than retirement savings. There are also signs that wealthier clients are feeling the squeeze. It’s a great chance for advisors to help clients prioritize spending to stay on track for retirement without overextending their resources today.

“While many are still contributing to retirement, they’re finding it harder to increase their savings each year,” said Nathan Sebesta, an advisor at Access Wealth Strategies. “Retirement savings shouldn’t simply be what’s left over at the end of the month. It should be treated like any other essential bill.”

Hands Off My Starbucks Latte

Lifestyle creep comes for us all, even the wealthy, said Bryan Byrer, founder of Millennial Financial Planning. “Just because people make a lot of money doesn’t mean that they’re always good at saving it.” Even if they’re making a high income, if their expenses are leaving them living somewhat closer to paycheck-to-paycheck than others, rising prices will certainly come into play. “They’re definitely going to feel that more than someone else who has a higher margin of savings,” he said.

Clients looking to rebalance their expenses can start with eating out: full-service restaurant prices have risen almost 4% since last June, according to the Consumer Price Index. “So many people eat out more than they really know they should or need to, and especially as the cost of goods goes up, that is more impactful than like the silly trope: ‘Get rid of your Starbucks latte,’” Byrer said.

He also highlighted a few other strategies:

• As the housing crisis deepens, renting longer may be a better choice than buying in the near term.
• One client found hiring an au pair was more cost-effective than daycare.
• Paying off credit cards daily lets clients earn points while always knowing their true bank balance.

TIPS of the Iceberg. Even for those whose savings are on track, rising costs have made clients far more focused on earning returns that outpace inflation, said Gautham Jain, president of Jain Wealthonomics. That’s reshaping asset allocation and retirement income strategies: risk-averse investors are turning to Treasury Inflation-Protected Securities and risk-tolerant clients are increasing equity exposure and using TIPS in place of traditional cash-like assets. “This was not a viable factor for most clients when inflation remained low,” said Jain.