PME (Public Market Equivalent)
PME compares private fund results to a public market benchmark using the fund’s actual cashflows.
Allocator relevance: High — answers “did this beat public markets given timing?” and is widely used in institutional benchmarking and manager selection.
Expanded Definition
PME frameworks map contributions and distributions onto a chosen public index to estimate an equivalent public outcome. Common approaches include Kaplan–Schoar PME (KS-PME) and Direct Alpha. PME is highly sensitive to (i) benchmark selection, (ii) cashflow timing, (iii) currency, and (iv) whether NAV is treated consistently.
Allocators use PME to contextualize IRR and TVPI, especially when public markets have strong or weak cycles that can distort perception of private performance.
Decision Authority & Governance
Governance requires transparent methodology (which PME type), benchmark rationale, sensitivity checks, and consistent application across funds. Institutions expect managers to avoid cherry-picked benchmarks or time windows.
Common Misconceptions
- PME is a single standardized number.
- Any equity index is an acceptable benchmark.
- PME replaces IRR/TVPI (it complements them).
Key Takeaways
- PME is benchmark-relative, cashflow-based context.
- Method + benchmark choice determines meaning.
- Use PME alongside IRR and multiples, not instead of them.