The J-curve, and the cost inside it
Almost anyone who has looked at a private fund has been shown the J-curve. You commit your capital, and for the first few years the return line sinks below zero before it swings up into profit, drawing the letter that gives the curve its name. It tends to be presented as a fact of life, the natural rhythm of the asset class. Across buyout funds raised between 2000 and 2020, the average fund spent about four years sliding to the bottom before it turned (Apollo). Most people accept the shape. Far fewer ask what its impact is.
The opportunity cost of uncalled capital:
When you commit to a fund, you do not hand over your capital and watch it go to work. You promise it. The manager then calls it in over several years, a slice at a time, as it is needed, and the part still in the queue sits in an odd kind of limbo. It cannot be put to work properly elsewhere because the fund can call it at any moment and you have to keep it liquid and ready. Not fully invested, and not free to use either.
That limbo has a price, and it is bigger than it looks. The table below compares the same portfolio companies but with the different capital deployment cycles of deal by deal vs a classic 10 year fund.
Deal by Deal | 10 Year Fund | |
|---|---|---|
Committed Capital | £100 | £100 |
Portfolio Growth | 20% | 20% |
Deployment Timeline | On Day 1 | Over 4 years |
Uncalled Capital Return | n/a | 6%, kept liquid |
Time to Exit | 10 Years | 10 Years |
Return after Year 10 | £619 | £490 |
Nothing in that table is about the companies. They returned the same 20% a year in both columns. The only thing that changed is how long your money sat on the sidelines before it could earn it. That delay quietly costs about £129 of profit for £100 you commit, close to a quarter of the gains you would otherwise have earned. No deal failed and no company missed a number. You simply paid for the years your capital spent in the waiting room.
The J-curve, in the end, is the cost of waiting to be invested. We think it's better for everyone if you don't wait.
Screenshots of the week
THANK YOUS:
Alex MacPherson - for your wisdom and watchouts from your deal-by-deal SPV days prior to the Octopus acquisition.
Lee Veitch - for being a great thesis sounding board and pressure tester
Claude - website development has never been so easy. Stay Tuned!
PLEASES:
Seed Investors - we are soon to be launching our seed round for investors to take a stake in the manager. Anyone worth talking to would be most welcome.
Brokers - we are looking for brokers working in our sectors (recession proof and post-AGI) that might be worth talking to.