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The Predictive Power of the J-Curve

Published in ACRN Journal of Finance and Risk Perspectives Vol. 3, Issue 4, Dec 2014, ISSN 2305-7394

48 Pages Posted: 23 Jul 2013 Last revised: 18 Feb 2015

Cyril Demaria

University of St. Gallen

Date Written: July 10, 2013

Abstract

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.

Keywords: private equity, venture capital, leveraged buy-out, cash-flow, solvency ratio, J-curve

JEL Classification: G24, G28, G32

Suggested Citation

Demaria, Cyril, The Predictive Power of the J-Curve (July 10, 2013). Published in ACRN Journal of Finance and Risk Perspectives Vol. 3, Issue 4, Dec 2014, ISSN 2305-7394. Available at SSRN: https://ssrn.com/abstract=2296967 or http://dx.doi.org/10.2139/ssrn.2296967

Cyril Demaria (Contact Author)

University of St. Gallen ( email )

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