Co-Investing: Maximizing Returns In Private Equity

What is the J-Curve?

The J-curve refers to the negative returns in primary closed-end private market funds during their early years. This occurs because capital invested gradually over several years may not generate enough returns in the early years to cover the fees charged by the fund manager as shown in the chart below.

Source: Corporate Finance Institute

Building a Portfolio of Private Market Funds

One strategy to achieve a flatter J-Curve is to build a portfolio of private market funds over time. The J-curves of the funds would be relatively uncorrelated. Thus, the returns from funds that are more fully invested would reduce the J-curve of the newer funds.

Co-Investing

Another strategy to reduce the depth and length of the J-curve in a private market investment is through co-investment.

Source: Corporate Finance Institute

Co-investments are made alongside a private market fund manager and provide the benefit of ownership without the high fees associated with a private market fund. Private fund managers offer co-investments to their larger investors to achieve greater control over their investments with the larger capital, and to reduce underwriting risk. Investors benefit from faster capital deployment that generate returns earlier to mitigate the J-curve. Simulations by BlackRock showed that a co-investment allocation of 20% to 30% can shorten the J-curve by 12 to 18 months.

Private Market Investment with The Family Office

Since 2004, The Family Office has helped clients invest in the best opportunities across private markets while navigating the challenges associated with this asset class. In 2022, the company launched a state-of-the-art digital platform that allows investors to simulate the performance of their portfolios and take control of their investments. Sign up to our digital investment platform or call us today to start investing in private markets.