J-curve

The dip in a private equity fund's reported return in its early years. Fees are charged from day one and value takes years, so it is negative by construction.

Where you will meet it

J-curve appears in 6 learning outcomes on the CFA syllabus. A few of them:

• Set out the stages at which private equity invests and the ways it exits
  CFA Level I · Alternative Investments

  “Capital is drawn down over time rather than invested at once, which is why early reported returns are usually negative — the J-curve, driven by fees charged before value is created.”

• Explain the effect of exchange rates on trade flows and capital flows
  CFA Level I · Economics

  “That pattern is the J-curve.”

• Explain the ways of investing privately and the vehicles used, and when each one suits an investor
  CFA Level III · Private Markets Pathway

  “They can also co-invest beside a GP at low or zero fees, invest directly, which needs in-house deal teams, or buy secondaries, which shorten the J-curve and give sellers liquidity.”

• Discuss how to judge whether alternative investments suit a given investor
  CFA Level III · Portfolio Construction

  “A long horizon is needed to wait out lock-ups and the J-curve of private funds.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with J · Glossary