A PE fund's net IRR is negative for the first 2–4 years of its life. Not because the GP is bad at investing. Because of accounting and fees.
Plot a PE fund's net IRR over time and you get a shape that looks like the letter J. Down first, then bending up sharply as exits start to land. That dip is the J-curve. Three forces pull it down before they let it climb.
A 2% management fee on committed capital starts ticking the moment the fund closes. Year one, the GP has called maybe 15% of capital, so all that fee comes out of a tiny invested base. The drag on net returns in year one is enormous.
When a fund buys a company, it sits on the books at the purchase price until something forces a markup — a new financing round, an exit, or a periodic valuation refresh. Reported NAV grows slowly. Fees compound steadily. Net of fees, you're underwater.
Most PE funds hold portfolio companies for 4–6 years before selling. Years 1 through 4 of fund life are mostly capital calls and quiet operating work. The exits (and the distributions, and the markups) cluster in years 5 through 8.
LPs understand the J-curve. It's expected. When a fund's J-curve is shallower than peers' — for instance, because of fast early markups or a single early exit — that's a positive signal. When it's deeper, it can mean fee drag is excessive, deployment is slow, or early-stage holdings haven't been remarked.
FundSim's J-curve tab plots NAV and cumulative cash flow year by year. Change the management fee, investment period, exit timing, or loss ratio and watch the curve deform. There's a bull/base/bear scenario overlay so you can see how the J-curve shifts under different exit assumptions.