Business, Legal & Accounting Glossary
J curve refers to the shape of a graph used in the fields of macroeconomics and finance to illustrate a turnaround. In macroeconomics, the J curve is typically used to show how the depreciation of a country’s currency tends to impact such a country’s trade deficit. First, the depreciation has a negative impact on the trade deficit caused by higher-priced imports (i.e bottom part of the “J”). Over time, however, the J curve effect shows that the trade deficit “turns around” (i.e. vertical part of the “J”) and decreases as the depreciation stimulates more exportations and reduces imports.
The J Curve is also used in the field of private equity where it refers to the performance of a private equity fund over time. The J Curve usually reflects performance as measured by internal rate of return (IRR). The J curve occurs because private equity involves large up-front injections of cash and usually takes a long time to return any of the benefits back to investors. In fact, the performance of private equity funds are almost always negative for a number of years before turning around and returning larger positive returns; hence the J Curve. The J Curve is caused by two main drivers. The first cause of the J Curve is the management fees that must be taken out of the cash infusion to account for management of the fund. The second main driver of the J Curve effect is that fact that companies in the portfolio of a private equity fund that go bad tend to do so earlier in the lifecycle of the fund than the turnaround by companies that will see growth. The write-down or write-off of the unsuccessful investments early on in the fund’s lifecycle serves to amplify the J Curve. The J Curve serves as a reminder to investors that private equity is a long-term asset class and positive returns in the early years are not to be expected. The J Curve is also known as the J-curve effect.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for J Curve are sourced/syndicated and enhanced from:
This glossary post was last updated: 9th February, 2020 | 10 Views.