Glossary · Performance & benchmarking

Public Market Equivalent (PME)

Also called: PME analysis · public market equivalent analysis

Public market equivalent (PME) is a family of methods that compare a private fund's performance with a public index by applying the index's returns to the fund's own contributions and distributions.

Publisher: Altss LLCPublished 2026-01-12Content modified 2026-10-01

ALTSS-PERF-019

A fund's IRR cannot be compared directly with an index's return, because the fund's money went in and came out at different times. PME methods ask a fairer question: if every dollar the LP paid into the fund had instead been invested in the index on the same dates, and taken out on the same dates as the fund's distributions, would the LP be better or worse off? Different methods answer in different units: a ratio, an IRR spread, or an annualised excess return.

Formulas

KS-PME (ratio)

KS-PME = (sum of distributions compounded to T at the index return + final NAV) / (sum of contributions compounded to T at the index return)

C_t, D_t: contributions and distributions on date t (positive amounts)
I_t: total-return index level on date t; I_T is the level on the valuation date
NAV_T: fund net asset value on the valuation date

Kaplan and Schoar (2005). Above 1.0 the fund beat the index on its own cash-flow timing. Not annualised.

Direct Alpha (annualised excess return)

alpha is the IRR of the fund's net cash flows after each has been compounded to the valuation date at the index return

\alpha: direct alpha per period; annualise if periods are shorter than a year

Gredil, Griffiths and Stucke (working paper 2014; Journal of Corporate Finance 2023). Uses the same inputs as KS-PME. LN-PME, PME+ and mPME instead build a hypothetical index portfolio and compare its IRR with the fund's IRR; see their pages.

The PME family compared

Method	Origin	Output	Index portfolio	Main limitation
LN-PME (Index Comparison Method)	Long and Nickels (1996)	IRR; compared as a spread to fund IRR	Buy index with each contribution, sell with each distribution	Residual holding goes negative for strongly outperforming funds
PME+	Rouvinez (2003)	IRR; spread	Distributions scaled by one factor so the index ends at fund NAV	Rescaling inflates the spread; undefined before the first distribution
KS-PME	Kaplan and Schoar (2005)	Ratio	Flows compounded to the end date at the index return	Not annualised; magnitude grows with fund life
mPME	Cambridge Associates, late 2000s (as described by Gredil, Griffiths and Stucke)	IRR; spread	At each distribution, index portfolio sells the fraction distribution / (distribution + remaining NAV)	Needs interim fund NAVs; errors in them bias the result
Direct Alpha	Gredil, Griffiths and Stucke (2014 working paper; published 2023)	Annualised excess return	IRR of index-compounded flows	Same NAV dependence as all methods

On the illustrative fund the methods agree in direction (the fund outperformed by roughly 6–7 points a year, or 24% over its life). They do not have to agree in size, and the IRR-spread methods inherit IRR's sensitivity to the timing of early distributions.

Choosing the index

The answer is only as good as the index. Use a total-return index (dividends reinvested) in the fund's currency, matched as closely as possible to what the fund owns: small- or mid-cap equity for buyout, sector indices for sector funds, leveraged-loan or high-yield indices for credit. None of these methods estimates a separate beta: each compares the fund with one unit of the index. Sorensen and Jagannathan (2015) show that the KS-PME is a theoretically valid measure when the index approximates the investor's overall wealth portfolio. When the index is a narrow or mismatched benchmark, differences in size, sector or style exposure show up as apparent out- or underperformance. Sensitivity to two or three plausible indices is more informative than a single figure.

Interpreting the results

A KS-PME above 1.0, a positive direct alpha, and a positive IRR spread under LN-PME, PME+ or mPME all say the same thing: the fund beat the index on its own cash-flow timing. KS-PME is a cumulative ratio, so a 1.24 over five years and a 1.24 over twelve years are different achievements; direct alpha is the annualised counterpart. For an unrealised fund every PME depends on the reported NAV, exactly as IRR and total value to paid-in (TVPI) do.

PME in GIPS reports

The Global Investment Performance Standards (GIPS) 2020 define a public market equivalent as the performance of a public market index expressed as a money-weighted return using the same cash flows and timing as the composite or pooled fund, which is the IRR-spread family's approach. A firm that presents a PME as the benchmark in a GIPS report must disclose the index used.

How LPs use PME

LPs report PMEs alongside net IRR and TVPI in manager due diligence, compare private-equity programmes with the public allocation they replace, and use PME to judge whether a vintage year's strong absolute returns were simply a strong market. A PME is complementary to quartile ranking: quartiles compare a fund with private peers, PME with a public alternative.

Worked examples

Illustrative fund and index, annual periods 0–5 ($ millions)

Contributions are 100 and 50 in periods 0 and 1; distributions are 20, 60 and 70 in periods 2 to 4; NAV is 80 at the end of period 5. A total-return index stands at 100, 110, 105, 120, 130 and 140 on the same dates. On these flows the fund's IRR is 12.9% and its TVPI 1.53x, while the index compounds at 7.0% a year. Compounding each flow to period 5 with the index gives a KS-PME of 1.24: the fund's distributions plus NAV are worth 24% more than the same contributions invested in the index.

Direct alpha on the same flows

The IRR of the index-compounded flows, the direct alpha, is 6.3% a year (6.1% continuously compounded).

Long–Nickels PME on the same flows

Buying the index with each contribution and selling it with each distribution leaves an index holding of 31.6 at period 5. The IRR of that hypothetical investment is 6.0%, so the LN-PME spread is 12.9% − 6.0% = 6.8 percentage points.

PME+ on the same flows

PME+ scales the distributions by λ = 0.72 so the index portfolio ends at the fund's NAV of 80. The resulting IRR is 6.3%, a spread of 6.6 points.

Examples are illustrative; figures are not market data.

Not the same as

Internal Rate of Return (IRR): IRR is an absolute money-weighted return; PME methods adjust the same cash flows for what a public index did over the same dates.
Time-Weighted Return (TWR): An index's time-weighted return (TWR) ignores the fund's cash-flow timing; PME applies the index to that timing.
Benchmark: A benchmark is the comparator; PME is a method for comparing a cash-flow-driven fund with an index benchmark.

Common mistakes

Presenting one PME method as "the PME" without naming it.
Comparing a fund's IRR with the index's time-weighted return over the same calendar years.
Using a price index instead of a total-return index.
Benchmarking a small-company buyout fund only against a large-cap index without testing a size-matched index.
Comparing a KS-PME ratio across funds of very different durations as if it were annualised.

Edge cases

For funds that return capital very quickly relative to the index, LN-PME's residual holding becomes negative and its IRR may be undefined; PME+, mPME, KS-PME and direct alpha avoid this.
Funds in a currency other than the index's require all flows and index levels in one currency, converted at each date.
Very young funds have PMEs driven almost entirely by NAV and are no more informative than their interim IRR.

Questions

Which PME method should I use?

KS-PME for a simple ratio, the form standard in academic work since Kaplan and Schoar (2005); direct alpha when an annualised excess return is needed. Name the method, the index and the valuation date with every result.

Does a PME above 1 mean the manager added value?

It means the fund beat that index on the same cash-flow timing. Part of the excess can reflect size, sector or style exposure that the chosen index does not capture.

External standards

Standard	Relation	Note
GIPS 2020 (Glossary: public market equivalent; provision 5.C.33)	related

Sources

A Private Investment Benchmark. Austin M. Long III; Craig J. Nickels, AIMR Conference on Venture Capital Investing (University of Texas System), Dated 13 February 1996. Status: Conference paper (not peer-reviewed) (checked 2026-10-01). Description of the Index Comparison Method — supports: Index Comparison Method (LN-PME)
Private Equity Benchmarking with PME+. Christophe Rouvinez, Venture Capital Journal, August 2003, pp. 34-38. Status: Trade journal article; no verified online copy (checked 2026-10-01). pp. 34–38 (cited via Gredil, Griffiths and Stucke, 2014 working paper, section II.A.2) — supports: PME+ scaling of distributions to avoid negative terminal value
Private Equity Performance: Returns, Persistence, and Capital Flows. Steven N. Kaplan; Antoinette Schoar, The Journal of Finance, Vol. 60(4), pp. 1791-1823, August 2005. Status: Published (journal paywalled; NBER w9807 working paper) (checked 2026-10-01). Vol. 60(4), pp. 1791–1823 — supports: Origin of the KS-PME ratio
Benchmarking Private Equity: The Direct Alpha Method. Oleg R. Gredil; Barry Griffiths; Ruediger Stucke, Journal of Corporate Finance, Vol. 81, 102360, August 2023; SSRN working paper 2014 (doi:10.2139/ssrn.2403521). Status: Published (paywalled) (checked 2026-10-01). SSRN working paper dated 2014-02-28: sections II.A.1-II.A.4 (ICM, PME+, mPME, IRR spreads), II.B (KS-PME), III (direct alpha); published version Vol. 81, article 102360 — supports: Direct alpha definition; ICM, PME+ and mPME mechanics, origins and limitations (mPME attributed to Cambridge Associates, developed in the late 2000s); IRR spreads are heuristics because compound rates are not additive
The Public Market Equivalent and Private Equity Performance. Morten Sorensen; Ravi Jagannathan, Financial Analysts Journal, Vol. 71(4), pp. 43-50. Status: Published (paywalled) (checked 2026-10-01). Vol. 71(4), pp. 43–50 — supports: KS-PME equivalent to valuation with Rubinstein's dynamic CAPM; index should approximate investor's wealth portfolio; leverage does not raise PME
The Economics of Private Equity: A Critical Review. Alexander Ljungqvist, CFA Institute Research Foundation, Literature review, 2024. Status: Published (checked 2026-10-01). PME section — supports: KS-PME as discounted distributions over discounted drawdowns; PME traced to Long and Nickels
GIPS Standards for Firms 2020 - Glossary (defined terms). CFA Institute, Glossary section of the 2020 edition. Status: Current (checked 2026-10-01). public market equivalent (PME) — supports: GIPS definition of PME as an index money-weighted return on the same cash flows
Global Investment Performance Standards (GIPS) for Firms 2020. CFA Institute, 2020 edition; effective 1 January 2020; required for GIPS Reports with periods ending on or after 31 December 2020. Status: Current (checked 2026-10-01). 5.C.33 — supports: Index used for a PME benchmark must be disclosed

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Concept record

Concept ID: ALTSS-PERF-019
Classification: Performance & benchmarking
Topics: Performance & benchmarking
Version: 2.0.0
Last reviewed: 2026-10-01
Structured data: JSON