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Private Equity IRR J-Curves

by Bronwyn Williams

  • 18 Dec 2009
  • PE

In private equity, J-curves show the evolution of a fund’s life from its early stages making its first investments to its later stages realizing mature investments. Typically, funds will show negative IRRs in the early stages, but as the fund begins to generate profit and return capital back to its investors, the IRR gradually moves into positive territory the fund manager exits all investments and the fund is liquidated. Since September 2008, performance for the private equity industry has noticeably dropped as the industry has been hit by the wider problems in the financial markets. December 2008 marks another low point for the industry as fund managers devalued their portfolios with the introduction of new fair valuation techniques.

Some vintages, most noticeably 2005 and 2006, are showing early signs of improvement as their returns have increased noticeably for Q2 2009, the most recent quarter for which data are available. These vintages were the hardest hit by the financial crisis as a significant portion of their investments were made at the peak of the credit boom, when share prices were at their highest and credit at its cheapest. Please see Performance Analyst for more information.

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