Credit Risk and the Private Equity J-Curve: A Framework for Risk-Adjusted Performance Measurement
Year: 2026
Type: article
Abstract: Private equity performance metrics recognize credit risk only when losses materialize, ignoring embedded default risk from the moment leverage is deployed. We develop a framework integrating Expected Credit Loss (ECL) methodology with J-curve analysis to quantify this forward-looking risk dimension. The framework complements rather than replaces traditional metrics, revealing probability-weighted downside exposure that peaks during re-commitment decisions for successor funds. Illustrative calibrations suggest embedded credit risk varies meaningfully with vintage year, sector concentration, asset composition, and GP quality - though external validation requires proprietary portfolio company default data that remains unavailable. We discuss potential applications for portfolio construction and performance evaluation.
DOI: 10.3905/jai.2026.008
Authors: Ben Charoenwong, Tze-Houng Lee
Institutions: INSEAD, INSEAD, INSEAD, Singapore University of Social Sciences
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7165000203