What is the J-Curve effect in private equity?

The J-Curve effect is a characteristic pattern of cash flows in private equity investments, visually representing an investor’s net cash flow over time. It shows an initial period of negative returns (a steep decline) before gradually rising into positive territory as the fund matures and exits investments. This pattern occurs due to initial capital investments, ongoing management fees, and delayed distributions from investments.

How does the J-Curve differ for Golden Visa investors compared to traditional private equity investors?

Most traditional private equity funds operate with multiple capital calls, where investors transfer funds in stages as investments are made, which helps to smooth out the early negative cash flow effect. Golden Visa investors, however, must commit their full amount upfront in a single capital call due to regulatory requirements. This results in a steeper and deeper initial negative cash flow for Golden Visa investors.

What is the fund distribution waterfall?

The fund distribution waterfall is a structured and prioritized method for distributing profits from a fund’s investments. It ensures that investors’ returns are prioritized, while also incentivizing the fund manager. The typical steps are: Return of Capital (investors get their initial investment back), Hurdle Rate (investors receive a minimum preferred return), Catch-Up (fund manager's share is 'caught up'), and finally, Profit Split (remaining profits are divided between investors and the fund manager based on an agreed ratio, commonly 80%-20%).

What is the '2 and 20' fee structure?

The '2 and 20' fee structure is a common compensation model for private equity fund managers. The '2%' refers to an annual management fee paid by investors to the fund manager, while the '20%' represents the share of net fund profits—known as carried interest or 'carry'—that is paid to the fund manager.

Why are dividends preferred over capital reductions for Golden Visa investors during the holding period?

Golden Visa regulations require investors to maintain their full €500,000 investment for at least five years. Dividends are treated as income and do not reduce the original investment amount, ensuring compliance with Golden Visa regulations. Capital reductions, however, return a portion of the original investment and could be interpreted as a reduction in the total required investment, potentially jeopardizing the investor’s Golden Visa status. While capital reductions are generally more tax-efficient for non-Portuguese tax residents (as they are tax-exempt in Portugal), dividends are the preferred method for Golden Visa investors during the mandatory holding period to avoid non-compliance risks.

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Understanding the J-Curve in Private Equity

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Cristóvão Matos

Managing Director

Nomera Capital

Published: Feb 17, 2025Updated: May 5, 2025