The J-curve that matters to a limited partner is cash, not reported IRR: how deep the hole gets, when it bottoms, and when it closes.
Calculate the J-curve as the running total of distributions minus capital calls, year by year, per 100 committed. On an illustrative fund that calls 92 and distributes 160, the curve bottoms at minus 58, or 58 per cent of the commitment, in years 3 and 4, and turns positive in year 7. The fund ends at 1.74x and a 15.5 per cent IRR, but for six years the investor is out of pocket.
Worked in full in The Private Markets Limited Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The J-curve is usually drawn as the since-inception IRR, negative in the early years and rising as the portfolio is marked up. That version describes reporting. The version a limited partner needs for liquidity planning is the cash version: how much money is out at the worst point, when the worst point comes, and when the fund has paid back what it called. Those three numbers drive commitment pacing, overcommitment and the size of the liquid reserve that has to sit beside the programme.
| Year | Capital called | Distributed | Net cash flow | Cumulative |
|---|---|---|---|---|
| 1 | 22 | 0 | −22 | −22 |
| 2 | 24 | 2 | −22 | −44 |
| 3 | 20 | 6 | −14 | −58 |
| 4 | 14 | 14 | 0 | −58 |
| 5 | 8 | 22 | 14 | −44 |
| 6 | 4 | 28 | 24 | −20 |
| 7 | 0 | 32 | 32 | 12 |
| 8 | 0 | 26 | 26 | 38 |
| 9 | 0 | 18 | 18 | 56 |
| 10 | 0 | 12 | 12 | 68 |
| Total | 92 | 160 | 68 |
Net cash flowt = distributionst − callst
Cumulativet = cumulativet−1 + nett. In Excel, with net flows in D2:D11, =SUM($D$2:D2) copied down.
Trough = the minimum of the cumulative column: =MIN(E2:E11) = −58, reached in year 3 and held in year 4.
Break-even year = the first year after the trough in which the cumulative is zero or above: year 7, when it reaches 12.
IRR on the net flows: =IRR(D2:D11) = 15.5%. Multiple = 160 ÷ 92 = 1.74x.
Three things fall out of the table. The trough is 58 per cent of the commitment but 63.0 per cent of the capital eventually called, because distributions begin in year 2, before the fund has finished drawing. The bottom is flat across years 3 and 4, the point where new calls and early exits cancel out. And break-even comes in year 7, so for the first six years the investor has more cash in the fund than out of it, whatever the reported NAV says.
Two refinements make the curve more useful. Model it quarterly rather than annually if the fund reports quarterly, because a trough that looks flat across two years can hide a sharper low inside them. And model calls gross of any subscription line: a fund that borrows against commitments delays its calls, which flattens the early curve and flatters the IRR, but the cash still leaves the investor's account later, usually in larger amounts.
| Scenario | TVPI | IRR | Trough | Trough year | Break-even year |
|---|---|---|---|---|---|
| Base case | 1.74x | 15.5% | −58.0 | 3 | 7 |
| Every distribution one year later | 1.74x | 12.2% | −72.0 | 4 | 8 |
| Distributions 20 per cent lower | 1.39x | 8.8% | −62.4 | 4 | 8 |
| Distributions 20 per cent higher | 2.09x | 21.4% | −56.4 | 3 | 7 |
| Same capital called in four years, not six | 1.74x | 13.3% | −72.0 | 3 | 7 |
Timing moves the trough far more than performance does. A fund that delivers 20 per cent less only deepens the hole by 4.4 points, to 62.4, because early distributions are small either way. A one-year slip in exits, with exactly the same multiple, deepens it by 14 points and pushes break-even out a year. Calling the capital faster deepens it by the same 14 points, though break-even stays in year 7. That is the scenario a limited partner controls least and should stress most: faster deployment is often reported as good news, and in cash terms it means a deeper hole at the same multiple and a lower IRR.
For a programme, not a fund. Run the same arithmetic on the sum of all vintages, each lagged by its commitment year, and the trough of the aggregate curve is the most cash the programme will ever have out. That is the figure an overcommitment ratio is tested against, and the figure the liquid reserve has to cover in a year when distributions stop.
The common mistake is to plan liquidity on the commitment, or on the IRR J-curve, instead of on the cash curve. Planning on the commitment overstates the cash need: the worst point here is 58, not 100, which is why commitment pacing can overcommit at all. Planning on the IRR curve understates the duration of the need: the since-inception IRR can turn positive in year 3 or 4 on write-ups, while the cash curve stays below zero until year 7. Neither tells you that a single year of delayed exits adds 14 points to the trough, and that is the stress the reserve exists to absorb.
Build the cumulative net cash flow line, read off the trough, the year it occurs and the break-even year, then stress the timing before the multiple. For a limited partner the depth and length of the J-curve are a liquidity budget. The companion workbooks in the free files for this book work through pacing and portfolio construction for a whole programme. For the ratios that summarise the same cash flows, see how to calculate TVPI, DPI and RVPI, and for how far the programme can commit beyond its target, the overcommitment ratio calculation.
It depends on how fast capital is called and how soon the first exits arrive, so any figure is illustrative. In the worked case a fund that calls 92 per 100 committed over six years bottoms at 58 per cent of commitment, or 63.0 per cent of what it eventually calls, because distributions start before the last call.
Not necessarily. In the worked case calling the same capital faster deepens the trough from 58 to 72 per cent of commitment and cuts the IRR from 15.5 to 13.3 per cent, but the multiple stays at 1.74x. The depth measures liquidity need; the multiple measures the result.
The IRR J-curve is the since-inception IRR using reported NAV, which is negative early because fees and costs hit before value is marked up. The cash J-curve ignores NAV and tracks money out and back. For pacing and liquidity planning the cash curve is the one to model, since NAV cannot fund a capital call.
This article is one calculation from The Private Markets Limited Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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