Private Equity Performance: J-Curves

by Bronwyn Williams

  • 14 Aug 2009
  • PE

Private equity IRRs illustrate the timings of capital calls and the distribution of capital for individual funds. Plotting the median IRRs for groups of funds yields a curve commonly referred to as the “J-curve” since the returns in the early years of a fund’s life are negative, and then slowly increase over time as the investor receives more capital, before stabilising in the final years of the fund’s life. Prior to the financial crisis, private equity J-curves showed a healthy return, with many vintages posting positive IRRs much sooner than anticipated.

However in the aftermath of the crisis private equity funds are showing a decrease in returns across all fund types. Naturally the more recent funds are the hardest hit: even though 2005 and 2006 vintages broke into positive territory, returns for these funds are now decreasing across the private equity industry. For example, buyout funds with a 2005 vintage saw their median IRR more than halved in a quarter, coming in at 2.5% in December 2008 after having posted 6.7% in September 2008. Vintage 2005 venture funds show a similar pattern, with a median IRR of -2.7% in December 2008 following a median of -0.64% at the end of the previous quarter. It is hard to guess the length of the current recession, but fund performance should improve again as the economy recovers. Unfortunately, it is unlikely that funds of these vintages will produce returns as high as their original target IRRs.

For more information on private equity fund performance, please see how our online Performance Analyst product can help you. Alternatively, similar data analysis can be found in the 2009 Preqin Private Equity Performance Monitor.

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