## Liquidity and Cash Flows

Private Equity investments are characterised by the so-called J-curve effect, and it is important to underline this fact. In the graph below we have illustrated this by the mechanics of the 6 following observations.

**Committed Capital**Investor A commits a certain amount: Index Capital Amount 100. As it is cash outflow for investor A we have noted the amount in the graph to -100. The committed capital stays at the same level over the life of the investment. Please do not equal Committed capital with Invested capital. These two notions are not the same. Please, refer to Commitment vs. Investment.

**Paid-in**

Investor A pays a certain amount of its total commitment, as and when called from the investment fund. The time horizon of these gross capital investments is typically a 6-8 years horizon.

**Distribution**

As a direct consequence of a realisation in the underlying investment fund, the returns will be re-distributed on a pro-rata basis to Investor A. Distributions will occur until the last investment is realised, thereby closing the fund.

**Cumulative Paid-in**

Typically the committed capital will be drawn over a 6-8 years period, the cumulative paid-in thereby approaching -100 over that time, by accumulating the net paid-in every year.

**Cumulative net cash flow**

Similar to the IRR curve, the cumulative net cash outflow deepens in the first years by the accumulated paid-in amounts and is smoothened in year 3, when the first distributions are returned. Typically, the net cash flow position reaches the lowest negative level the year in which the IRR curve turns positive. As from this year, the net cash flow increases every year by the net amount redistributed to Investor A. As can be noted, the maximum net outstanding cash flow is rarely more than 70% of total committed capital. Please refer to Commitment vs. Investment.

**IRR**

Representing the J-curve, the IRR is negative over the first couple of years. Initially the curve is steeply falling as the management fee weighs on the modest actually invested capital with no cash returns as of yet. Please note that actual invested capital is quite insignificant during this time, and that the undrawn capital can be invested alternatively for a positive return until the cash is drawn. Typically, Investor A will get its first cash return in year 3, whereby the J-curve will have bottomed in year 2 and is now trending toward positive, which usually happens in year 4-5. Investor A would then experience a continuously rising IRR until the end of the term for the fund.