Glossary · Fund life

What is the J-curve?

The J-curve is the usual pattern where a fund’s reported returns dip below zero in its early years, because of fees and costs before investments mature, and then climb.

In practice

The dip comes mainly from management fees and organizational expenses charged on committed capital while little is yet invested, and from holding investments at cost early on. It shows up in net IRR and TVPI, not usually in gross figures. Subscription lines can shorten or flatten it. Credit and secondaries funds tend to show a shallower curve than venture or buyout funds.

An example

Round numbers, not a real fund

Say a fund is down 5% after year two, flat after year four, and up 15% after year seven. Plotted, it looks like the letter J.

Why it matters

It tells new investors not to panic at early negative returns, and tells everyone to be suspicious when a young fund has none.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.

Related terms

IRRIRR, internal rate of return, is the yearly return that accounts for when money goes into and comes out of a fund, so earlier payouts raise it.
TVPITVPI, total value to paid-in capital, adds the cash a fund has already returned to the value it still holds, then divides by the money investors paid in.
Management feeThe management fee is the annual charge investors pay a manager to run a fund, often 1% to 2% of committed capital during the investment period.
Subscription lineA subscription line is a short-term loan to a fund, backed by investors’ unfunded commitments, that lets the manager invest before calling investors’ cash.
Vintage yearA fund’s vintage year is usually the year it first called capital or made its first investment. Funds are compared with others from the same vintage.

The terms, in the news each morning.

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