As most Digest readers well understand when drawdowns and distributions are combined to show the net cash flows to investors over time, this normally results in a “J-curve”, illustrated in the chart above from VentureChoice.
A new study about fund performance and the J-curve by Cyril Demaria of the University of Saint-Gallen in Switzerland is the topic of an editorial in Private Equity International. The theory put forward by Demaria is that because these J-curves are quite distinctive in shape, it starts to become clear from about the third year of a fund’s life which performance category it is likely to end up in.
The editors assessed the study’s limitations and conclusions and agree with Demaria that the consequences of such analysis could be significant for the PE Indusstry because it helps to overcome problems with the lack of transparency and liquidity in a portfolio of funds. “If an LP can get a decent sense of how a fund is likely to perform after just a couple of years, it should allow them to address these concerns and assess the level of risk in their portfolio more accurately.
This could help inform new investment decisions [by limited partners] and mitigate regulatory capital demands.” It also has implications for the secondary market, and helping to benchmark performance across the portfolio.