{"concept_id":"ALTSS-PERF-019","slug":"public-market-equivalent","canonical_name":"Public Market Equivalent","acronym":"PME","aliases":["PME analysis","public market equivalent analysis"],"kind":"metric","authority":"academic","facets":["PRF"],"domains":["PERFORMANCE"],"display_title":"Public Market Equivalent (PME)","search_aliases":["what is pme","public market equivalent private equity","pme calculation","ks pme vs direct alpha","pme methods compared","private equity vs public markets"],"one_sentence_definition":"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.","plain_english":"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.","parent_concepts":[],"child_concepts":["ks-pme","long-nickels-pme","pme-plus","modified-pme","direct-alpha"],"related_concepts":["benchmark","irr","net-irr","alpha","beta"],"comparison_concepts":[],"not_the_same_as":[{"slug":"irr","distinction":"IRR is an absolute money-weighted return; PME methods adjust the same cash flows for what a public index did over the same dates."},{"slug":"time-weighted-return","distinction":"An index's time-weighted return (TWR) ignores the fund's cash-flow timing; PME applies the index to that timing."},{"slug":"benchmark","distinction":"A benchmark is the comparator; PME is a method for comparing a cash-flow-driven fund with an index benchmark."}],"formula_ids":["F-PERF-019-ks-pme-ratio","F-PERF-019-direct-alpha-annualised-excess-return"],"worked_examples":[{"title":"Illustrative fund and index, annual periods 0–5 ($ millions)","paragraphs":["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](/glossary/ks-pme) of **1.24**: the fund's distributions plus NAV are worth 24% more than the same contributions invested in the index."],"calc":{"fn":"ks_pme","inputs":{"contributions":[100,50,0,0,0,0],"distributions":[0,0,20,60,70,0],"nav_final":80,"index":[100,110,105,120,130,140]},"expected":{"ks_pme":1.2378},"tol":0.0005}},{"title":"Direct alpha on the same flows","paragraphs":["The IRR of the index-compounded flows, the [direct alpha](/glossary/direct-alpha), is **6.3% a year** (6.1% continuously compounded)."],"calc":{"fn":"direct_alpha","inputs":{"contributions":[100,50,0,0,0,0],"distributions":[0,0,20,60,70,0],"nav_final":80,"index":[100,110,105,120,130,140]},"expected":{"direct_alpha":0.063,"direct_alpha_continuous":0.0611},"tol":0.0005}},{"title":"Long–Nickels PME on the same flows","paragraphs":["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](/glossary/long-nickels-pme) spread is 12.9% − 6.0% = 6.8 percentage points."],"calc":{"fn":"ln_pme","inputs":{"contributions":[100,50,0,0,0,0],"distributions":[0,0,20,60,70,0],"nav_final":80,"index":[100,110,105,120,130,140]},"expected":{"ln_pme_irr":0.0601,"ln_pme_nav":31.585,"fund_irr":0.1285},"tol":0.0005}},{"title":"PME+ on the same flows","paragraphs":["[PME+](/glossary/pme-plus) 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."],"calc":{"fn":"pme_plus","inputs":{"contributions":[100,50,0,0,0,0],"distributions":[0,0,20,60,70,0],"nav_final":80,"index":[100,110,105,120,130,140]},"expected":{"pme_plus_irr":0.0628,"lambda":0.7186},"tol":0.0005}}],"sections":[{"heading":"The PME family compared","paragraphs":["| Method | Origin | Output | Index portfolio | Main limitation |\n|---|---|---|---|---|\n| 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 |\n| 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 |\n| KS-PME | Kaplan and Schoar (2005) | Ratio | Flows compounded to the end date at the index return | Not annualised; magnitude grows with fund life |\n| 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 |\n| 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."]},{"heading":"Choosing the index","paragraphs":["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."]},{"heading":"Interpreting the results","paragraphs":["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."]},{"heading":"PME in GIPS reports","paragraphs":["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."]},{"heading":"How LPs use PME","paragraphs":["LPs report PMEs alongside [net IRR](/glossary/net-irr) and [TVPI](/glossary/tvpi) in manager due diligence, compare private-equity programmes with the public allocation they replace, and use PME to judge whether a [vintage year](/glossary/vintage-year)'s strong absolute returns were simply a strong market. A PME is complementary to [quartile ranking](/glossary/quartile-ranking): quartiles compare a fund with private peers, PME with a public alternative."]}],"classification_rules":[],"calculation_rules":[],"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."],"external_standard_mappings":[{"standard":"GIPS 2020","reference":"Glossary: public market equivalent; provision 5.C.33","relation":"related","source_id":"SRC-GIPS-2020-GLOSSARY"}],"source_ids":["SRC-ACAD-GREDIL-GRIFFITHS-STUCKE-2023","SRC-ACAD-KAPLAN-SCHOAR-2005","SRC-ACAD-LONG-NICKELS-1996","SRC-ACAD-ROUVINEZ-2003","SRC-ACAD-SORENSEN-JAGANNATHAN-2015","SRC-CFA-RF-LJUNGQVIST-2024","SRC-GIPS-2020-FIRMS","SRC-GIPS-2020-GLOSSARY"],"citations":[{"source_id":"SRC-ACAD-LONG-NICKELS-1996","pinpoint":"Description of the Index Comparison Method","supports":"Index Comparison Method (LN-PME)","source":{"source_id":"SRC-ACAD-LONG-NICKELS-1996","title":"A Private Investment Benchmark","authors":"Austin M. Long III; Craig J. Nickels","publisher":"AIMR Conference on Venture Capital Investing (University of Texas System)","document_type":"paper","url":"http://www.alignmentcapital.com/pdfs/research/icm_aimr_benchmark_1996.pdf","year":1996,"publication_date":"Dated 13 February 1996","jurisdiction":"intl","status":"Conference paper (not peer-reviewed)","last_verified":"2026-10-01"}},{"source_id":"SRC-ACAD-ROUVINEZ-2003","pinpoint":"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","source":{"source_id":"SRC-ACAD-ROUVINEZ-2003","title":"Private Equity Benchmarking with PME+","authors":"Christophe Rouvinez","publisher":"Venture Capital Journal","document_type":"paper","year":2003,"publication_date":"August 2003, pp. 34-38","jurisdiction":"intl","status":"Trade journal article; no verified online copy","last_verified":"2026-10-01"}},{"source_id":"SRC-ACAD-KAPLAN-SCHOAR-2005","pinpoint":"Vol. 60(4), pp. 1791–1823","supports":"Origin of the KS-PME ratio","source":{"source_id":"SRC-ACAD-KAPLAN-SCHOAR-2005","title":"Private Equity Performance: Returns, Persistence, and Capital Flows","authors":"Steven N. Kaplan; Antoinette Schoar","publisher":"The Journal of Finance","document_type":"paper","url":"https://doi.org/10.1111/j.1540-6261.2005.00780.x","doi":"10.1111/j.1540-6261.2005.00780.x","year":2005,"publication_date":"Vol. 60(4), pp. 1791-1823, August 2005","jurisdiction":"intl","status":"Published (journal paywalled; NBER w9807 working paper)","last_verified":"2026-10-01"}},{"source_id":"SRC-ACAD-GREDIL-GRIFFITHS-STUCKE-2023","pinpoint":"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","source":{"source_id":"SRC-ACAD-GREDIL-GRIFFITHS-STUCKE-2023","title":"Benchmarking Private Equity: The Direct Alpha Method","authors":"Oleg R. Gredil; Barry Griffiths; Ruediger Stucke","publisher":"Journal of Corporate Finance","document_type":"paper","url":"https://doi.org/10.1016/j.jcorpfin.2023.102360","doi":"10.1016/j.jcorpfin.2023.102360","year":2023,"publication_date":"Vol. 81, 102360, August 2023; SSRN working paper 2014 (doi:10.2139/ssrn.2403521)","jurisdiction":"intl","status":"Published (paywalled)","last_verified":"2026-10-01"}},{"source_id":"SRC-ACAD-SORENSEN-JAGANNATHAN-2015","pinpoint":"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","source":{"source_id":"SRC-ACAD-SORENSEN-JAGANNATHAN-2015","title":"The Public Market Equivalent and Private Equity Performance","authors":"Morten Sorensen; Ravi Jagannathan","publisher":"Financial Analysts Journal","document_type":"paper","url":"https://doi.org/10.2469/faj.v71.n4.4","doi":"10.2469/faj.v71.n4.4","year":2015,"publication_date":"Vol. 71(4), pp. 43-50","jurisdiction":"intl","status":"Published (paywalled)","last_verified":"2026-10-01"}},{"source_id":"SRC-CFA-RF-LJUNGQVIST-2024","pinpoint":"PME section","supports":"KS-PME as discounted distributions over discounted drawdowns; PME traced to Long and Nickels","source":{"source_id":"SRC-CFA-RF-LJUNGQVIST-2024","title":"The Economics of Private Equity: A Critical Review","authors":"Alexander Ljungqvist","publisher":"CFA Institute Research Foundation","document_type":"paper","url":"https://rpc.cfainstitute.org/sites/default/files/-/media/documents/article/rf-brief/economics-of-private-equity.pdf","year":2024,"publication_date":"Literature review, 2024","jurisdiction":"intl","status":"Published","last_verified":"2026-10-01"}},{"source_id":"SRC-GIPS-2020-GLOSSARY","pinpoint":"public market equivalent (PME)","supports":"GIPS definition of PME as an index money-weighted return on the same cash flows","source":{"source_id":"SRC-GIPS-2020-GLOSSARY","title":"GIPS Standards for Firms 2020 - Glossary (defined terms)","authors":"CFA Institute","publisher":"CFA Institute","document_type":"standard","url":"https://www.gipsstandards.org/wp-content/uploads/2021/03/2020_gips_standards_firms.pdf","year":2019,"publication_date":"Glossary section of the 2020 edition","jurisdiction":"intl","status":"Current","last_verified":"2026-10-01"}},{"source_id":"SRC-GIPS-2020-FIRMS","pinpoint":"5.C.33","supports":"Index used for a PME benchmark must be disclosed","source":{"source_id":"SRC-GIPS-2020-FIRMS","title":"Global Investment Performance Standards (GIPS) for Firms 2020","authors":"CFA Institute","publisher":"CFA Institute","document_type":"standard","url":"https://www.gipsstandards.org/wp-content/uploads/2021/03/2020_gips_standards_firms.pdf","year":2019,"publication_date":"2020 edition; effective 1 January 2020; required for GIPS Reports with periods ending on or after 31 December 2020","jurisdiction":"intl","status":"Current","last_verified":"2026-10-01"}}],"faq":[{"q":"Which PME method should I use?","a":"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."},{"q":"Does a PME above 1 mean the manager added value?","a":"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."}],"seo":{},"first_published":"2026-01-12","last_reviewed":"2026-10-01","last_modified":"2026-10-01","content_version":"2.0.0","url":"https://altss.com/glossary/public-market-equivalent","json_url":"https://altss.com/reference/concepts/public-market-equivalent.json","title":"Public Market Equivalent (PME)","formulas":[{"formula_id":"F-PERF-019-ks-pme-ratio","concept_id":"ALTSS-PERF-019","label":"KS-PME (ratio)","plain":"KS-PME = (sum of distributions compounded to T at the index return + final NAV) / (sum of contributions compounded to T at the index return)","latex":"\\mathrm{KS}\\text{-}\\mathrm{PME}=\\frac{\\sum_t D_t\\,I_T/I_t+\\mathrm{NAV}_T}{\\sum_t C_t\\,I_T/I_t}","variables":[{"symbol":"C_t, D_t","meaning":"contributions and distributions on date t (positive amounts)"},{"symbol":"I_t","meaning":"total-return index level on date t; I_T is the level on the valuation date"},{"symbol":"NAV_T","meaning":"fund net asset value on the valuation date"}],"convention_note":"Kaplan and Schoar (2005). Above 1.0 the fund beat the index on its own cash-flow timing. Not annualised.","implementation":"ks_pme"},{"formula_id":"F-PERF-019-direct-alpha-annualised-excess-return","concept_id":"ALTSS-PERF-019","label":"Direct Alpha (annualised excess return)","plain":"alpha is the IRR of the fund's net cash flows after each has been compounded to the valuation date at the index return","latex":"0=\\sum_t (D_t-C_t)\\frac{I_T}{I_t}(1+\\alpha)^{-(t-t_0)}+\\mathrm{NAV}_T(1+\\alpha)^{-(T-t_0)}","variables":[{"symbol":"\\alpha","meaning":"direct alpha per period; annualise if periods are shorter than a year"}],"convention_note":"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.","implementation":"direct_alpha"}],"sources":[{"source_id":"SRC-ACAD-GREDIL-GRIFFITHS-STUCKE-2023","title":"Benchmarking Private Equity: The Direct Alpha Method","authors":"Oleg R. Gredil; Barry Griffiths; Ruediger Stucke","publisher":"Journal of Corporate Finance","document_type":"paper","url":"https://doi.org/10.1016/j.jcorpfin.2023.102360","doi":"10.1016/j.jcorpfin.2023.102360","year":2023,"publication_date":"Vol. 81, 102360, August 2023; SSRN working paper 2014 (doi:10.2139/ssrn.2403521)","jurisdiction":"intl","status":"Published (paywalled)","last_verified":"2026-10-01"},{"source_id":"SRC-ACAD-KAPLAN-SCHOAR-2005","title":"Private Equity Performance: Returns, Persistence, and Capital Flows","authors":"Steven N. Kaplan; Antoinette Schoar","publisher":"The Journal of Finance","document_type":"paper","url":"https://doi.org/10.1111/j.1540-6261.2005.00780.x","doi":"10.1111/j.1540-6261.2005.00780.x","year":2005,"publication_date":"Vol. 60(4), pp. 1791-1823, August 2005","jurisdiction":"intl","status":"Published (journal paywalled; NBER w9807 working paper)","last_verified":"2026-10-01"},{"source_id":"SRC-ACAD-LONG-NICKELS-1996","title":"A Private Investment Benchmark","authors":"Austin M. Long III; Craig J. Nickels","publisher":"AIMR Conference on Venture Capital Investing (University of Texas System)","document_type":"paper","url":"http://www.alignmentcapital.com/pdfs/research/icm_aimr_benchmark_1996.pdf","year":1996,"publication_date":"Dated 13 February 1996","jurisdiction":"intl","status":"Conference paper (not peer-reviewed)","last_verified":"2026-10-01"},{"source_id":"SRC-ACAD-ROUVINEZ-2003","title":"Private Equity Benchmarking with PME+","authors":"Christophe Rouvinez","publisher":"Venture Capital Journal","document_type":"paper","year":2003,"publication_date":"August 2003, pp. 34-38","jurisdiction":"intl","status":"Trade journal article; no verified online copy","last_verified":"2026-10-01"},{"source_id":"SRC-ACAD-SORENSEN-JAGANNATHAN-2015","title":"The Public Market Equivalent and Private Equity Performance","authors":"Morten Sorensen; Ravi Jagannathan","publisher":"Financial Analysts Journal","document_type":"paper","url":"https://doi.org/10.2469/faj.v71.n4.4","doi":"10.2469/faj.v71.n4.4","year":2015,"publication_date":"Vol. 71(4), pp. 43-50","jurisdiction":"intl","status":"Published (paywalled)","last_verified":"2026-10-01"},{"source_id":"SRC-CFA-RF-LJUNGQVIST-2024","title":"The Economics of Private Equity: A Critical Review","authors":"Alexander Ljungqvist","publisher":"CFA Institute Research Foundation","document_type":"paper","url":"https://rpc.cfainstitute.org/sites/default/files/-/media/documents/article/rf-brief/economics-of-private-equity.pdf","year":2024,"publication_date":"Literature review, 2024","jurisdiction":"intl","status":"Published","last_verified":"2026-10-01"},{"source_id":"SRC-GIPS-2020-FIRMS","title":"Global Investment Performance Standards (GIPS) for Firms 2020","authors":"CFA Institute","publisher":"CFA Institute","document_type":"standard","url":"https://www.gipsstandards.org/wp-content/uploads/2021/03/2020_gips_standards_firms.pdf","year":2019,"publication_date":"2020 edition; effective 1 January 2020; required for GIPS Reports with periods ending on or after 31 December 2020","jurisdiction":"intl","status":"Current","last_verified":"2026-10-01"},{"source_id":"SRC-GIPS-2020-GLOSSARY","title":"GIPS Standards for Firms 2020 - Glossary (defined terms)","authors":"CFA Institute","publisher":"CFA Institute","document_type":"standard","url":"https://www.gipsstandards.org/wp-content/uploads/2021/03/2020_gips_standards_firms.pdf","year":2019,"publication_date":"Glossary section of the 2020 edition","jurisdiction":"intl","status":"Current","last_verified":"2026-10-01"}]}