Private equity is an illiquid, medium-term investment for a number of reasons. Firstly, it takes time to turnaround, grow and develop businesses. Secondly, this process, by its very nature, requires cash up front and then delivers cash much later in the game; income along the way is just cream.

The term “J-Curve” is the net cumulative cash position of a private equity investment over the life of the fund. That is, net cash flows are negative in the formative years and become highly positive in later years, and the net cumulative position looks like the letter “J” on a chart.

The J-Curve effect intensifies because funds are much more likely to write assets down than write them up. This is more to do with accounting standards than conservatism. In most instances, the lower of cost or market value is used in valuations. On the other hand, an asset’s value is rarely written up unless there is a cash inflow event. This means that unrealised gains could be accruing, but until the investment is exited, they won’t be declared or reported.