In short:
- The J-curve describes negative performance early in a fund’s life, then positive.
- It comes from fees charged early and the time needed to grow companies’ value.
- Gains mainly arrive when holdings are sold, late in the fund’s life.
- A disappointing statement in the first years is not a sign of failure.
Where the J shape comes from
A private equity fund invests gradually during its first years. During that phase, it pays management and transaction fees while its holdings are still valued at purchase price.
The three phases
| Phase | What happens | Effect on performance |
|---|---|---|
| Investment | The fund buys holdings | Rather negative |
| Value creation | Companies grow | Gradual recovery |
| Exit | Holdings are sold | Gains realised and distributed |
Key takeaway
Investing in private equity means accepting a long lock-up and judging a fund over its full life. Comparing two funds of different ages makes no sense.