Market Headwinds Challenge LPs' Cash Pacing -Part II
The slowdown in distributions affects the J-curve breakeven for PE funds. The J-curve represents the return pattern PE firms encounter early in a fund’s life cycle. Initially, investments lead to short-term negative returns due to expenses. As investments mature, positive returns emerge, and the J-curve turns upward. The breakeven point occurs when the fund’s net asset value matches investor commitments.
Put simply, funds are returning cash later and many of the cash pacing models deployed by many LPs, either internal or third-party, are unable to accommodate such changes. Many LPs overcommit to funds in order to offset distributions later in the fund’s life and maintain their allocation. With the J-curve breakeven now later than models might predict based on historical patterns, managing private market exposure is harder for LPs – and portfolios run the risk of getting out of balance.
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