In the first two or three years the fund has paid management fees on committed capital and holds investments still carried at or near cost, so the net internal-rate-of-return is negative. Nothing has gone wrong; the arithmetic simply cannot show gains yet.
The curve turns as portfolio companies are revalued upward and early exits return cash. A fund's IRR measured at year three tells you almost nothing about its final result, which is why interim rankings of recent vintages are close to meaningless.
Investors building a private programme often commit across several years specifically to overlap curves, so distributions from older funds help meet calls on newer ones. See vintage-year and capital-call.
Related: internal-rate-of-return, vintage-year, capital-call, private-equity, venture-capital, distributions-to-paid-in