In 2020, TechCrunch reported that Softbank expected $24 billion in losses from its Vision Fund, founded in 2017, saying that founder Masayoshi Son “was too enamored of the mythology he’d created around himself as a maverick and a visionary.”
These harsh words aged poorly, as the following year, Softbank landed the biggest profit in the history of a Japanese company—over $45 billion in group net profit year-over-year, topping even the profit made by Warren Buffet’s Berkshire Hathaway.
What happened? In a word, the J-Curve.
In finance, the J-Curve is the graphical representation of how an investment’s short-term performance can belie its long-term potential. Simply put, the J-Curve is the time it can take for an investment to show returns.
In the case of Softbank’s Vision Fund, the initial losses were quickly overshadowed by the fund’s eventual profitability. And while it’s still too early to declare the Vision Fund a complete success, the early returns are certainly encouraging.
Of course, not all investments follow such a smooth path to profitability. For many, the road to the J-Curve ends before the growth phase. But the rewards can be immense for those with the patience and fortitude to weather the storm.
Why a Long Holding Period is Key
Investors in a private equity fund may find themselves in the position of having committed capital to a fund with a 10-year holding period. At the end of that holding period, the fund can be liquidated and the proceeds distributed to the investors.
However, the fund’s investors don’t necessarily have to wait 10 years to reap the rewards of their investment. Instead, they can choose to exit the investment early through a process known as a secondary market sale.
A secondary market sale is when an investor sells interest in a private equity fund to another investor, ideally at a price above the original investment. Of course, selling on the secondary market is not without risk. By selling early, an investor gives up the potential upside of the J-Curve.
Softbank’s Vision Fund is a perfect example of that potential upside. Had investors in the fund sold on the secondary market after the initial losses were reported, they would have missed out on the fund’s eventual profitability. The key, then, is to find an investment with the potential to follow the J-Curve and to have the patience and fortitude to hold on to that investment for the long term.
Beyond the Vision Fund: The J-Curve is Everywhere
Entire volumes have been written about the J-Curve and its implications for investors. But the phenomenon is not limited to private equity and venture capital. The J-Curve can be seen in all sorts of areas, from trade balances to the path of nations from authoritarianism to democracy.
Investors would do well to keep the J-Curve in mind when making any investment. Even the most unlikely investment can eventually follow the J-Curve to profitability with a long enough holding period.
There are several ways to take advantage of the J-Curve. One is to invest in actively managed funds, which typically require a minimum investment of $500,000 per fund. For the average investor, this is out of reach. However, another way to gain exposure to these top-tier funds is through a Gridline Thematic Portfolio product, which allows you to invest in 5-10 institutional-grade funds for a minimum investment of just $100,000.
With Gridline, you can get the same exposure to top-performing actively managed funds as the large endowments, but at a fraction of the cost. This ideal way to take advantage of the J-Curve and potentially achieve outsized wealth creation.