What is the Private Equity "J Curve"?

The question: what is the private equity "J curve"?

A "J curve" plots the funds a private equity firm draws down from its investors over time.

To start with, the private equity firm draws down cash from investors and cash flow for investors is negative (the lower and initial part of the "J"). As time goes on, the private equity firm starts distributing funds back to investors, and cash flow becomes positive (the upper part of the "J").

The steeper the J curve, the quicker cash is returned to investors. A private equity firm that can make quick returns to investors provides investors with the opportunity to reinvest that cash elsewhere.

Of course, investors and private equity firms have been caught out. Private equity firms have found it harder to sell businesses they previously invested in. Proceeds to investors have reduced. J curves have flattened dramatically.

This leaves investors with less cash flow to invest elsewhere. For example, in other private equity firms. As a result, private equity firms have had to restructure their agreements with investors, allowing them to renege on previous funding commitments.

The implications for private equity could well be severe. Being unable to sell businesses to generate proceeds and being unable to invest as much as they expected is dire news for this segment of the funds management industry. Lower funds under management means lower fees and some in the industry are predicting consolidation amongst private equity firms.

About Financial Training Associates: the company

Financial Training Associates conducts financial training courses in topics such as private equity, as well as financial modelling training courses in Excel and valuation. Please see FTA Ltd’s cpd-courses.org website for an example introductory training course covering private equity buy outs.