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English: J-curve Effect
Definition: generally refers to people in the study earnings of private equity funds, will be the time as the horizontal axis, vertical axis in order to draw a yield curve. Through long-term observation, it was found that the trajectory of this curve is substantially similar to the letters J, so this phenomenon is vividly called J-curve effect.
Interpretation: The internal rate of return of private equity funds generally exhibit J-curve effect, ie positive returns usually occurs in the later years of the life of the fund. Prior to this, namely the existence of early stage funds, private equity funds worth a downward trend, this stage is often referred to as "the valley of tears (valley of tears)".
J-curve effect can create cost valuation policy and administrative expenses as well as the manager used to explain.
(1) the creation of costs and management fees
Due to deduct the cost of the creation and management fees from the funds raised for the first time is a kind of common practices, so the initial value of the Fund's assets is less than investors originally invested capital. And in previous years, these costs with the actual costs and the creation of investment capital is particularly high in comparison, because the calculation basis of those costs and the creation of scale rather than the actual cost of the entire investment in the Fund.
(2) Valuation Policy
When a private equity fund in early life, the need for the valuation of assets at the time of the fund portfolio value and to calculate the internal rate of return. The fund will generally conservative valuation methods, so book early fund will tend to underestimate the value of assets or a combination of the poor performance of investments write-offs.
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