All tagged J-Curve

Private Equity’s J-Curve and Its Mitigation

Within private equity, a fund’s returns often resemble a J-Curve where there exists a small loss before a continued gain. This image would resemble a “J” when charted. This is especially common for private equity firms that purchase struggling companies and attempt to turn them around. These firms will take on unprofitable businesses, and tag along management fees that keep investor returns low or negative until their investments begin to mature, and the purchased businesses become profitable. This creates a period wherein traditional private equity investment is unprofitable and returns are low, or the dip at the beginning of the “J”. These cash flows depend on the “timing of cash flows, timing of performance, and market performance” (Diller, 20). By pulling these levers one way or another, the J-curve can be manipulated. With research indicating that funds with at least 15% private investment outperform their peers, the benefits of seeking these investments are clear. But how can we reduce the time in which these investments underperform?