The J Curve
Lemons Ripen First
The term "J curve" is used by PI cognoscenti to describe the pattern of returns produced by certain private equity funds that produce negative returns early on but later soar in value (see illustration). Some PI veterans would argue that "J curve" is an apt description of the pattern of returns produced by most if not all private equity funds, but that is untrue. In the late 1990s, for example, many venture capitalists whose technology-laden portfolios would normally have displayed a pronounced J curve effect (down, then up) displayed a half-V effect instead (i.e., straight up). This is because the upward rerating of winning positions (through IPOs or subsequent private financings) more than offset the downward rerating of losing ones. Truth be told, the term J curve is typically invoked not by private equity managers with winning portfolios but by private equity managers with troubled ones. One other definitional point: the left-hand (downward) side of J-like returns are attributable not only to portfolio lemons that ripen early, but also to the deleterious impact of fees and upfront expenses.
