The Predictive Power of the J-Curve

Dealing with a recurring low level of data quality in private equity, we propose a novel approach of understanding the behavior of private equity funds (PEFs): we use PEFs' illiquidity as a factor of analysis. To do so, we measure the distance between PEF cash-flows (“J-Curves”) and return categories (“ideal-types”) that we have identified through our novel reasoning. As a result, our model excludes the attribution of a given fund from certain return categories in early years. It then attributes a fund to a specific category with a high level of confidence. By doing so, this model could help reducing solvency costs of investing in PEFs, as well as support the analysis of existing PEFs either by their current investor or for new investors on the secondary market