IRR Over Time
The actual IRR performance of any limited partnership is not known until the final liquidation of the partnership, typically over 10 to 12 years. Until the liquidation takes place, the IRR is only an interim estimated return.
The IRR calculated for a partnership in the first three years of its life are relatively meaningless given the "J-curve effect." The J-curve phenomenon is the effect of the cash-flow behavior of a partnership. It can be summarized as the first year's investment expenses of investing in a fund that has yet to harvest its capital gains in the future. This normally translates into a negative IRR in the early years of the fund. The plot of the partnership values over time generally resembles a letter J.
Unfortunately, no excuse will make up for a default wave in the PE investment portfolio as much as CalSTRS may desire the opposite, because once equity becomes worthless, it stays worthless. As such, the "plot of the partnership value over time" will generally resemble the letter L.
I present the full CalSTRS PE portfolio below for our readers' enjoyment. Notable top five investments by capital committed:
Texas Pacific Group: $3.1 billion
Blackstone: $2.9b billion
CVC Capital Partners: $1.9 billion
Welsh Carson: $1.8 billion
Permira: $1.7 billion
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