J-curve effect

In the early years, private equity funds usually show low or negative returns. Over time, companies progress and values increase resulting in unrealized gains above original cost. In the final years, higher valuations are confirmed by the partial or complete sale of companies, resulting in cash flows to the partners. The effect of this timing on the fund's interim returns is known as the J-Curve Effect. In practice, a private equity portfolio involves a series of J-Curves because funds are invested in at different times. However, not all funds will be profitable given the inherent risks of investing in private equity, including macroeconomic factors and the performance of underlying companies.