Public Market Equivalent
Public Market Equivalent (PME) is a private equity performance benchmarking methodology that simulates what an investor would have earned had the same cash flows — capital calls and distributions — been invested in a public market index instead of the private fund, enabling a like-for-like comparison between private and public market returns.
IRR and MOIC measure private fund returns in isolation. Public Market Equivalent analysis answers the more relevant comparative question: did this private fund outperform the opportunity cost of investing in publicly traded equities? The PME methodology, introduced by Austin Long and Craig Nickels in 1996 and subsequently refined by researchers including Kaplan and Schoar, Lundborg, and others, provides a rigorous framework for that comparison.
The most widely used PME method — the Kaplan-Schoar PME — calculates the net present value of a hypothetical investment in a public index using the private fund's actual cash flow dates and amounts. Each capital call is treated as a purchase of index units; each distribution is treated as a sale of index units at current market value. The terminal value of the PME portfolio is the value of remaining index units at the end of the measurement period. A PME ratio above 1.0x means the private fund generated more wealth than the public index would have over the same cash flow timeline. A PME below 1.0x means the private fund underperformed.
The choice of benchmark index materially affects PME results. U.S. large-cap buyout funds are commonly benchmarked against the S&P 500 or the Russell 3000. Venture capital funds are often benchmarked against the Nasdaq Composite or the Russell 2000 Growth. Using a less-appropriate benchmark can flatter or penalize a fund's apparent relative performance, so the index selection should match the fund's investment universe.
Several variations of PME methodology exist beyond the original Kaplan-Schoar formulation. The Long-Nickels PME, also called the IRR-PME, adjusts the public index investment size to equate terminal values, then compares the implied IRRs. The PME+ approach, developed by Capital Dynamics, modifies cash flows so that the PME portfolio and the private fund end with the same terminal value, then compares IRRs directly. Each approach has different sensitivities to timing and portfolio size, and practitioners typically compute multiple PME variants to triangulate a robust comparison.
PME analysis has become a standard component of institutional private equity due diligence and performance reporting. Leading data providers and LP consultants compute PME across fund databases to assess whether private markets as an asset class — and individual managers within it — have generated returns above publicly accessible alternatives after accounting for the illiquidity premium, fee load, and complexity costs of private fund investing.
The broader policy implication of PME research is significant: studies by Kaplan and Schoar, Harris, Jenkinson, and Robinson, and others using large fund databases have found that the median private equity fund has historically generated PME above 1.0x relative to the S&P 500, but the distribution is wide and the top-quartile managers generate substantially more excess return than the bottom quartile generates underperformance. This return dispersion makes manager selection in private equity a higher-stakes decision than in most public market strategies, where the gap between top and bottom quartile managers is much narrower.