J-curve mitigation with secondaries: how funded interests help

The J-curve is the shape of an investor's cumulative net cash flow in a private equity fund: negative for the first several years as capital is called and fees are charged, then rising as companies are sold and cash is returned. Secondaries mitigate it because the buyer acquires an interest that is already funded, often at a discount to NAV, in a fund that is closer to its distribution phase. Goldman Sachs Asset Management's introduction to secondaries cites Cambridge Associates data, as of Q3 2025 across the 2000 to 2019 vintages, showing buyout funds' cumulative net cash flow bottoming at 55.5% of commitment, against 40.8% for secondaries funds. The curve is shallower and shorter.

Where the J-curve comes from

Two things drive the early dip. The first is cash: a primary fund calls capital over its investment period, usually four to five years, and invests it in companies that will not be sold for several more years. For the investor, money goes out long before any comes back. The second is reported performance: management fees in the early years are charged on committed capital and spread across a small invested base, so the fund's net asset value starts below the cash contributed. Goldman Sachs Asset Management separates these as the cash-flow J-curve and the performance J-curve. Both ease as investments are made, marked up and eventually realised.

For a family office the practical consequences are a long period of negative net cash flow and a portfolio whose reported return looks poor for several years. Forecasting the cash side is covered in forecasting capital calls.

How a funded interest changes the arithmetic

A secondary buyer steps into an existing position. Three things differ from a primary commitment.

The capital is already largely invested, so the buyer pays for identifiable companies rather than a blind pool, and the remaining unfunded commitment is smaller. The entry price is usually below NAV: Jefferies' July 2026 review put average LP portfolio pricing at 87% of NAV in H1 2026, with buyout at 91%. If the NAV is a fair estimate of value, the discount is booked as a gain on day one, which offsets the fee drag that creates the performance J-curve. And the fund is older, so distributions begin sooner.

The table below is an illustrative comparison constructed for this article. It assumes a $10m commitment to a new buyout fund drawn over five years, versus $10m spent buying funded interests in year-four funds at 90% of NAV with $1m of remaining unfunded commitment. Distributions are assumed, not sourced, and are intended only to show the shape.

Illustrative only. The secondary line starts deeper because the purchase price is paid at once, but it crosses zero around year six rather than year seven and does not sink as far relative to the cash deployed over the life of the position.

The example makes the point that mitigation is about timing. The secondary buyer's money is out of pocket on day one, in exchange for a shorter wait and a shallower trough measured against total capital at work.

Evidence on risk

The shorter holding period and visibility of the assets show up in loss data. Goldman Sachs Asset Management cites Preqin figures, as of May 2026 and covering the 2000 to 2021 vintages with at least five years of track record, showing 4.3% of secondaries funds below cost, against 7.0% for buyout, 16.5% for real estate and 18.6% for venture and growth. The same page notes that secondary funds have historically had lower loss ratios than primary funds across strategies, although it gives no dispersion figures.

Two caveats apply. The Cambridge Associates chart cited by Goldman Sachs Asset Management also shows buyout funds ending with a higher cumulative net cash flow than secondaries, which is consistent with secondaries trading some long-run multiple for earlier cash. And pricing has tightened. Campbell Lutyens' 1H 2026 report found evergreen buyers paying 92.1% of NAV for LP portfolios, so the day-one discount for diversified buyout exposure is now in single digits for some buyers.

Using secondaries in a programme

Three uses are common. An office starting a private equity programme can buy interests from earlier vintages to reach a mature, cash-generating portfolio faster than primary commitments alone would allow. An office with a lumpy vintage profile can fill the gaps. And an office that wants private equity exposure without a decade of negative cash flow can weight the programme towards secondaries and accept a somewhat lower final multiple. The choice between doing this through a fund or directly is discussed in secondaries funds versus buying interests directly, and the buyer case more broadly in secondaries for family office buyers.

The J-curve is the cost of investing in companies before they are sold. Secondaries let an investor choose how much of that cost to bear.