The FundFilter Blog

Private Fund J-Curves: How Long Is Your Private Fund Commitment?

We analyzed thousands of J-curves across various strategies and discovered several insights that may impact your view of private market commitments.

FundFilter

In pursuit of our ongoing mission to bring more transparency and accessibility to private fund data for all investors, we analyzed the life cycles (or j-curves) of thousands of private market funds. Through our analysis we have come away with several insights that have important consequences for the growing universe of private fund investors.

To set the appropriate framework, it is worth reviewing the ‘conventional pitch’ of a fund life to investors. A traditional private fund typically has a 10-year term in its offering material. The Fund Manager (GP) typically has two yearlong extension options to liquidate remaining portfolio assets, which technically implies a combined 12-year term of a fund.

Representative Fund J-curve
Representative Fund J-curve

Within this timeframe, there is an investment period of five to seven years, during which the fund manager purchases portfolio assets and works to enhance the fund’s performance. This is followed by a five- to seven-year harvest period. At this point, the fund manager positions the investment for liquidation to monetize a return for the fund’s investors.

That’s the pitch. Our analysis of thousands of j-curve data reveals a much different reality, insights that may impact how investors deploy their capital and their timing expectations. Large institutional investors may perform this level of analysis on their own or purchase it from large data companies. Smaller or less-resourced investors usually don’t have access to such j-curve analytics, so we decided to provide it here.

In practice, fund commitments can have timelines that go well beyond the 10 to 12 years initially indicated in the fund terms. Understanding and planning for this could be the difference between realizing significant returns within a reasonable time period or having capital tied up—and unavailable for potentially more lucrative opportunities—for longer than you might expect.

Here are our top three takeaways regarding private fund j-curves and what you need to know.

1. Private market funds take an average of c. 9 years to return invested capital.

Looking across the six core private fund strategies, we observed a wide range of j-curve outcomes. The big takeaway for investors is that the average time it takes to return invested capital (the breakeven) is c. 9 years. This suggests that the total life of the fund could be quite longer than 12 years to generate required investment returns on top of returning investors’ capital. The following charts highlight this for the respective six core private market strategies where we express the ‘mean fund’ per strategy as being the average of the net cash flows of the respective individual funds.

Private Equity J-CurvesPrivate Debt J-Curves
Venture Capital J-CurvesReal Estate J-Curves
Diversified J-CurvesReal Assets J-Curves

Source: FundFilter.com.

Some strategies like Venture Capital take up to an average of 11 years to break even, reflecting the increasing length for which these funds hold assets. On the other end, Private Debt typically returns capital to investors within 7 years because loans are often refinanced before their scheduled term, and in general, have a five- to seven-year maturity.

A solid understanding of a strategy’s expected j-curve enables investors to manage their cash flows and overall portfolio more efficiently. For instance, knowing the possible cash flow characteristics of an investment, you may choose to diversify your portfolio differently or invest in other shorter-term opportunities depending on your cash needs. In addition, continuously tracking a fund’s comparison to thousands of historic j-curves provides guidance on the fund’s trajectory, and the likelihood of its distributions. This information can help investors decide when to reposition portfolios through secondary sales or top-up purchases. Cash flow forecasting such as this is becoming a must have for large institutional investors.

2. The outperformance of top-quartile funds is significant.

While the importance of top-quartile performers is well understood in the market, looking at that relative performance through j-curves is quite telling. By breaking down j-curves into quartile performance (the quartile mean in the charts below), you can see by how much the top quartile funds outperform the rest of the group in terms of the speed of returning capital to investors and the ultimate performance of the investment over the initial 12 years of the fund’s life.

The graphs below split the j-curves into top quartile (Green), mean (Grey), and bottom quartile (Red). There is a large pull away of the top-quartile funds across all strategies when it comes to returning capital. As noted previously, this has real consequences for cash flow management, recycling, and the ability to re-up on existing relationships. For example, within Private Equity the top quartile funds break even at c. 6 years, while the mean breaks even at 8 years.

The analysis also reveals a greater range of outcomes even within the top quartile funds. That means that if you’re seeking superior performance (and who isn’t?), then just having a top-quartile fund in your portfolio may not tell the true upside or opportunity cost.

Private EquityPrivate Debt
Venture CapitalReal Estate
DiversifiedReal Assets

Source: FundFilter.com.

All of this suggests that investors need to visualize and quantify the actual alpha generated by a fund manager to its peer group. Being slightly on one side or the other of the 75th percentile may technically put a fund into the top or second quartile. But to make a more accurate assessment, you also want to see the dispersion of performance between your selected fund and others.

Private Equity funds J-Curve Dispersion

3. J-curves can be a leading indicator of performance or of problems ahead.

Through our inventory of thousands of j-curves, we have leveraged descriptive statistics and machine learning algorithms to produce various analytical models. In doing so, we extrapolated some meaningful trends that can help investors make even better decisions.

image

Source: FundFilter.com.

For example, by observing the development of a j-curve as a fund starts reporting performance, we can see how that performance is trending and forecast what investors may expect for the future. Such tools not only allow investors to generate a view of how a particular fund’s cash flow might develop, it also projects the net asset value of the fund and projects the possible run down of a portfolio. Combined, a user can then model an entire portfolio of fund investments and assess their netting effect to better understand the portfolio’s cash needs and projected risk exposure over several years.

As the charts highlight, there are real dollar consequences to not being within the top quartile—and an early understanding of performance allows you to be proactive. For most investors, private fund investing consists of just one decision over the course of a 12+ year commitment: “do I invest in this fund or not?”. We consider it critical for investors to be able to access relevant tools which provide a risk return assessment before making this long term investment decision.

Investors deserve access to private fund data

We built FundFilter to provide the necessary access to private fund data and analytics for every type of investor regardless of size, experience or budget. We consider it important that all such investors have access to data in order to have a better understanding of the risk return proposition of various strategies, how well or poorly a fund manager may have performed, what the cash flow implications of a fund commitment might look like as well as how to better assess future commitments within a portfolio.

FundFilter was built to help inform investors and level the playing field to the benefit of all participants in the market.

Log into FundFilter.com today... access is free and signing up takes seconds.


This website and any associated content is for informational use only and does not constitute a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction whatsoever. The content made available via this website is not guaranteed to be error-free and is not intended to meet any particular user’s needs or requirements. Past or historical results are not indicative of future performance. Nothing in this website or any associated content should be construed as investment, legal, tax or other advice of any nature whatsoever and should not be relied on in making an investment or other decision. Always obtain relevant and specific independent professional advice before making any investment or other decision.

Private Markets in a Downturn

Private funds are often pitched as a source of diversification from public markets. How does that stack up when reviewing data from various market corrections over the past 15 years?

FundFilter

In the past fifteen years there have been several noticeable market corrections. Three in particular were quite severe: the Great Financial Crisis (GFC) of 2008, Black Monday of 2011 and more recently the COVID Crisis of early 2020. Three very different events, over different time horizons, driven by different forces. Nonetheless, our research, which surveys data from thousands of private funds representing tens of thousands of portfolio assets, yields interesting results on:

  • How much diversification do private market funds provide against public markets?
  • What is the relative performance of various private fund strategies to each other?
  • What might all this imply for the next correction?
Diversification against public markets.

Portfolio companies of private funds are typically marked each quarter in one of three ways: (i) marked to valuations of publicly listed peers, (ii) marked to recent transactions of a similar size in the respective sector or (iii) marked based on discounted cash flows. This can result in a certain element of correlation to public markets but to what extent? The two charts below, where we map the quarterly asset value growth rates to a public index (the Russell 3000 index) using FundFilter data, provide some answers to that question.

Quarterly Asset Value Growth Rates: Q4 2006 - Q3 2020
Quarterly Asset Value Growth Rates: Q4 2006 - Q3 2020

Source: FundFilter.com.

Asset Value growth levels for private market funds are calculated using the Yale Model across several thousand private funds. Adjustments are made for extreme growth values caused by a denominator effect of funds in the early stage of ramping up. Intra day swings in public markets might be higher than indicated.

A number of immediate things jump out here. First is the severity of the GFC. Second is the number of meaningful market corrections over the past 15 years. Third is the comparative performance of the various six private market strategies to the public markets and eachother.

Let's focus on this latter point. The charts below highlight this relative performance to the Russell 3000 during three of the more meaningful corrections over the past 15 years. In all three situations, the public markets demonstrated a much more severe decline which on an intra-day basis could be even more extreme than portrayed in this quarterly snapshot.

2008 GFC (Quarterly Growth Rates Indexed to Q4 2007)
2008 GFC (Quarterly Growth Rates Indexed to Q4 2007)
2011 Black Monday (Growth Indexed to Q2 2011)2020 Covid Crisis (Growth Indexed to Q4 2019)
2011 Black Monday (Growth Indexed to Q2 2011)2020 Covid Crisis (Growth Indexed to Q4 2019)

Source: FundFilter.com.

All six private fund strategies demonstrated a more moderate reaction, were slower to correct and slower to rebound than the public market equivalent. Hence, on average, they each demonstrated a portfolio diversification benefit.

This can be attributed to a number of factors such as (i) a less reactionary mark to market valuation process of fund managers compared to the undulations of public markets which are subject to both higher sentiment trading as well as automated algorithmic trading, (ii) fund managers selection of various valuation approaches in assessing marks and (iii) the ongoing monetary easing environment which allows many fund managers to better renegotiate debt financings and extend maturities, avoiding large default cycles and prolonged recovery.

Private fund strategies relative performance to each other.

While the various private strategies may demonstrate less volatility to the public markets, they also demonstrate interesting relative movement against each other in a market correction. Again, as can be seen in the charts below reflecting three of the more severe downturns, there is a mixed bag of results to unpack.

2008 Financial Crisis - Asset Value Growth
2008 Financial Crisis
2011 Black Monday2020 Covid Crisis
2011 Black Monday2020 Covid Crisis

Source: FundFilter.com.

The GFC was by far the most severe test that private assets have experienced in recent memory. The severity and longevity of the slowdown meaningfully impacted nearly every private market asset class. Private Equity, Diversified Funds and Venture Capital all experienced multiple periods of negative growth from Q1 2008 through Q1 2009 with each enduring a c. 9%-12% drop at the lowest point in Q4 2008. On a cumulative basis the negative growth amounted to -21% for Private Equity, -21% for Diversified Funds and -19% for Venture Capital.

Looking at all three downturns there are notable observations to be highlighted.

Private Debt Funds demonstrate meaningful sensitivity to market corrections, largely in line with private equity. Many private loans have a liquid secondary market which would often obligate fund managers to mark-to-market. The GFC in particular saw senior loans of companies with solid credit profiles trade at meaningful discounts due to their relative liquidity and the need of certain market participants to generate liquidity regardless of cost.

Real Estate Funds were hit particularly hard during the GFC due to the nature of the housing crisis and they collectively experienced a longer decline and slower recovery. Conversely, in other market corrections Real Estate demonstrated much more resilience to prevailing market conditions.

Finally, Real Asset Funds (made up of infrastructure, energy & natural resources) navigated relatively well through the 2008 and 2011 crises, however were meaningfully impacted through the 2020 Covid crisis. The primary reason for this was the ongoing cyclical downturn that oil & gas had been experiencing for several years in addition to the immediate reduction in demand for various fuels due to the dramatic drop in travel Covid caused.

What does this mean for a future correction?

With market analysts forecasting a potential 10-15% correction (possibly greater), what might that mean for the various private market strategies? Looking over the past 15 years of when public markets declined by 5% or more in a single quarter, we have taken the average of such occurrences in increments of 5-10%, 10-15% and 15-20% declines for each of the six private market strategies.

While “past performance is no guarantee of future results”, the following charts might provide some indication of what to expect on average across these strategies.

Average drop in asset value per private fund strategy related to a decline in public markets

5-10% public market decline10-15% public market decline15-20% public market decline
5-10% public market decline10-15% public market decline15-20% public market decline

Source: FundFilter.com.

Finally we would note that the time it has taken for private fund strategies to revert to their respective pre-correction levels also varies depending on the severity of the crisis. For the three scenarios mentioned above the following charts provide some indications of what that might mean going forward.

2008 GFC - Recovery Time to Pre-Correction Asset Value Levels (Years)
2008 GFC - Recovery Time to Pre-Correction Asset Value Levels
2011 Black Monday - Recovery Time (Years)2020 Covid Crisis - Recovery Time (Years)
2011 Black Monday - Recovery Time (Years)2020 Covid Crisis - Recovery Time (Years)

Source: FundFilter.com.

We built FundFilter to provide the necessary access to private fund data and analytics for every type of investor regardless of size, experience or budget. We consider it important that all such investors have access to data in order to have a better understanding of the risk return proposition of various strategies, how well or poorly a fund manager may have performed, what the cash flow implications of a fund commitment might look like as well as how to better assess future commitments within a portfolio.

FundFilter was built to help inform investors and level the playing field to the benefit of all participants in the market.

Log into FundFilter.com today... access is free and signing up takes seconds.


This website and any associated content is for informational use only and does not constitute a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction whatsoever. The content made available via this website is not guaranteed to be error-free and is not intended to meet any particular user’s needs or requirements. Past or historical results are not indicative of future performance. Nothing in this website or any associated content should be construed as investment, legal, tax or other advice of any nature whatsoever and should not be relied on in making an investment or other decision. Always obtain relevant and specific independent professional advice before making any investment or other decision.

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