What you should know:

  • The term “J-curve” refers to the typical pattern of returns for private equity investments –named because the graphical representation over the lifespan of the investment resembles the letter “J.”
  • During a private equity fund’s investment period, the fund’s performance is typically negative due to management fees and fund expenses.
  • As the portfolio companies in a fund increase in value and are sold at a profit, the negative trend in performance starts to flatten out, and eventually becomes positive.

What is a J-curve?

Within private markets, the term “J-curve” refers to the typical pattern of returns for private equity investments –named because it resembles the letter “J.” This pattern shows initial negative returns followed by positive returns in later years, reflecting the process of investing capital and creating value.

A private equity fund’s returns are typically negative at first. This happens because this period, also known as the capital call period, is when the fund begins investing capital in various companies (i.e., portfolio companies). During this early phase, the fund incurs acquisition expenses. Additionally, the portfolio companies may require additional investments to support growth initiatives, which can further weigh on returns.

This period of negative performance generally spans three to four years following the fund’s inception, as the fund’s manager charges fees and expenses while it acquires companies.

Over time, however, the portfolio companies become more valuable. And as the fund begins selling off its portfolio companies at a profit, the negative trend that we initially witnessed starts to flatten out, and eventually becomes positive. This trajectory – the initial decline in returns, the stabilization in performance, and eventual steep rise in returns – when plotted on a graph, resembles the letter “J”.

Understanding J-Curves

The Trajectory of Private Equity Returns over Time

Of course, each investor is unique – with their own tolerance for negative returns at the onset of their investment. As a result, investors employ various strategies, such as planning for a longer investment horizon or diversifying their investments. Some private market investors turn to secondaries, which is an investment product that focuses on more mature companies that are further along in their life cycles. These are companies that are already producing cash flows. By purchasing secondaries, investors can better avoid the negative impact of management fees and expenses during the initial investment period.

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