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FRM Part II · FRM Exam Part II · Private Markets Investing

A risk manager reviews a venture capital fund of funds and notes that reported returns follow a J-curve over the fund life. Which explanation best accounts for the J-curve?

The J-curve arises because management fees and write-downs of failing portfolio companies hit early in the fund life, producing negative returns, while successful investments are typically valued up and exited only years later, lifting cumulative returns afterward.

  1. AManagement fees and write-offs of failed investments occur early, while gains from successful investments are realized laterCorrect
  2. BEarly investments are always the best performers and later ones dilute returns
  3. CVenture funds use high leverage that raises interest costs in later years
  4. DValuations are marked to market daily, producing early volatility

Explanation

Fees are charged on committed capital from the start and weaker companies are written down early, while winners mature and exit later, producing negative early returns followed by gains. Leverage is not a feature of venture funds, and valuations are not marked daily.

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