medium · Private Equity & LBOs

How does the 'J-Curve' effect typically influence the IRR of a newly formed private equity fund during its first three years?

1. The IRR remains flat at 0% until the first realization event.
2. The IRR is typically artificially high due to the small amount of capital deployed.
3. The IRR is typically negative due to management fees and organizational expenses being paid before significant value creation or exits occur.
4. The IRR follows the public market benchmark until the portfolio is fully ramped.

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