Public Market Equivalent (PME)
Definition
The Public Market Equivalent (PME) is a benchmarking approach for private investment funds. It asks: “If the LP had invested the same amounts of capital, at the same times, into a public market index instead of this fund, what return would they have earned?” The result provides a contextualised comparison between private fund performance and a liquid alternative.
Important: PME is not a single method. There are several distinct PME methodologies (Kaplan-Schoar, Long-Nickels, mPME, PME+, and others) that use different assumptions and can give materially different results for the same fund. Always confirm which methodology is being used before comparing PME figures across funds or reports.
Why It Matters
IRR and MOIC measure performance in isolation. They do not tell you whether the return justified the illiquidity, fees, and complexity of private markets. A PE fund with a 14% net IRR looks attractive – until public markets returned 17% over the same period with full liquidity and lower cost.
PME contextualises private fund returns by:
- Replicating the same cash flow timing as the actual fund in a public index
- Using the same invested capital, deployed on the same dates
- Producing a directly comparable return or value multiple
How the Main Methods Work (Conceptual)
Kaplan-Schoar PME (most widely cited)
- Each capital call is “invested” in the chosen index on the same date
- Each LP distribution is “funded” by selling the equivalent index holding on the same date
- The remaining index portfolio value is compared to the fund’s remaining NAV
- PME > 1.0 = fund outperformed the index. PME < 1.0 = underperformed.
Known limitation of KS PME: If distributions are large relative to the index holding, the method can require “selling” more of the index than exists, producing nonsensical results in periods of poor public market performance. This is unusual but operationally relevant for very large distribution events relative to a falling index.
mPME / Long-Nickels PME
These variants use the fund’s NAV directly, distributing the index portfolio in proportion to how the fund distributes to LPs, rather than dollar-for-dollar. This avoids the KS PME arithmetic problem and is considered more robust for interim comparisons.
PME IRR
An alternative output: the IRR the public index would have generated if it received the same cash flows (calls and distributions) as the actual fund. This can be compared directly to the fund’s own IRR.
Common Benchmarks Used
The choice of benchmark significantly affects the PME result. The benchmark should be appropriate to the fund’s strategy and geography:
| Strategy | Common Benchmark |
|---|---|
| US buyout | S&P 500, Russell 2000 |
| European PE | MSCI Europe |
| Global PE | MSCI World, MSCI ACWI |
| Venture capital | NASDAQ Composite, MSCI World |
| Infrastructure | Infrastructure-specific indices (e.g., EDHEC) |
A GP selecting a weaker-performing benchmark will appear to outperform more easily. LPs should verify benchmark appropriateness.
Worked Example
A PE fund calls £10m in Year 1 and £10m in Year 2. It distributes £35m in Year 7.
Hypothetical (Kaplan-Schoar PME using MSCI World):
- £10m invested in MSCI World in Year 1 grows; the equivalent index holding at Year 7 would be £18m
- £10m invested in MSCI World in Year 2 grows; equivalent holding at Year 7 would be £15m
- £35m distributed by the fund in Year 7; same amount sold from the index portfolio in Year 7
- Residual index holding: £0m (all sold to match the distribution)
Fund total returned: £35m. Index equivalent total: £33m.
KS PME = £35m / £33m = 1.06× (fund outperformed the index by ~6%)
Note: figures are illustrative only. Actual PME calculations require index total return data (including dividends) on exact cash flow dates.
Key Limitations
- PME does not adjust for risk. A PE fund and a public index take very different risks (illiquidity, leverage, concentration vs diversification). PME compares returns, not risk-adjusted returns.
- PME > 1.0 does not mean the investment was worthwhile. An LP must also consider whether the illiquidity premium was sufficient for their specific situation, the additional fees paid, and the opportunity cost of committed but uncalled capital.
- Different methods give materially different PME figures. Do not compare PME across funds unless the methodology is identical.
- Interim PME depends on NAV quality. PME calculated before a fund is fully wound down uses the GP’s estimated residual NAV. If that NAV is optimistic, interim PME will be overstated.
- Benchmark selection is a significant variable. A poorly matched benchmark undermines the entire comparison.
- PME is backward-looking. It tells you what happened, not what future returns will be.
Operational Relevance
For operations and reporting teams:
- PME calculations require a full, timestamped history of LP capital calls and distributions – these must be maintained accurately in fund accounting systems
- Index total return data (dividends reinvested) must be sourced for exact cash flow dates; approximations introduce error
- PME should be recalculated each reporting period as new cash flows occur
- Specialist LP portfolio systems (such as Burgiss, Milestone, or Canoe) typically include PME calculation modules; confirm the methodology each platform uses
Related Files
Manual Review Notes
- The product names in the Operational Relevance section (Burgiss, Milestone, Canoe) should be verified for accuracy and continued relevance; technology providers change and merge.
- ILPA and other industry bodies have published guidance on PME reporting standards. Reference to current public guidance would strengthen this file.
- The KS PME “negative holding” problem is real but rarely encountered in practice by most LP portfolios. Monitor for fund-level situations where distributions in a single period approach or exceed total index holdings.