A "J curve" plots the funds a private equity firm draws down
from its investors over time.
To start with, the private equity firm draws down cash from
investors and cash flow for investors is negative (the lower and
initial part of the "J"). As time goes on, the private equity firm
starts distributing funds back to investors, and cash flow becomes
positive (the upper part of the "J").
The steeper the J curve, the quicker cash is returned to
investors. A private equity firm that can make quick returns to
investors provides investors with the opportunity to reinvest that
cash elsewhere.
Of course, investors and private equity firms have been caught
out. Private equity firms have found it harder to sell businesses
they previously invested in. Proceeds to investors have reduced. J
curves have flattened dramatically.
This leaves investors with less cash flow to invest elsewhere.
For example, in other private equity firms. As a result, private
equity firms have had to restructure their agreements with
investors, allowing them to renege on previous funding
commitments.
The implications for private equity could well be severe. Being
unable to sell businesses to generate proceeds and being unable to
invest as much as they expected is dire news for this segment of
the funds management industry. Lower funds under management means
lower fees and some in the industry are predicting consolidation
amongst private equity firms.
This entry has been published by Financial Training Company
http://www.financialtrainingassociates.com/
