What is a J curve?
A J curve is a graphical representation of the expected trajectory of investment returns following a specific event. It is commonly used in private equity scenarios, and it represents an initial decline, followed by a subsequent rise that leads to a net positive gain. Therefore, the graph looks like the letter “J.”
This representation indicates an initial period of loss or negative performance before positive results may be realized. For example, in a private equity fund, there’s a significant amount of cash outflow as capital is invested in portfolio companies and management fees are collected. Startup costs are high and companies take time to grow. However, as they do (and they start to generate returns), the performance of the portfolio may grow, leading to potential gains and a net positive return for investors.
