Public Market Equivalent (PME)
Private Equity glossary · Private Equity Fundamentals
Definition
A family of benchmarks comparing PE fund cash flows to investing the same cash flows in a public-market index. Two main variants: (i) Kaplan-Schoar PME (KS-PME, multiple-based): KS-PME = sum_t D_t/I_t div sum_t C_t/I_t — values >1.0x indicate outperformance vs. the index; (ii) Long-Nickels / Direct Alpha (rate-based): construct a shadow portfolio in the index that receives each contribution and distribution as they occur, compute the shadow IRR, and report the spread (Direct Alpha = Fund IRR - Shadow IRR). PME is the cleanest test of whether PE is delivering its illiquidity premium.
Public Market Equivalent (PME) in plain English
Private-equity funds love to boast about their returns, but that's not impressive unless they beat what you'd have earned by just buying the stock market instead. The Public Market Equivalent (PME) is the honest scoreboard: it imagines your exact same cash — every dollar you put in and every dollar you got back, on the very same dates — invested in a public index like the S&P 500, then asks 'did the PE fund actually do better?' The simplest version divides what the fund paid you by what the index would have; a score above 1.0 means the fund won. This matters because PE locks your money up for years, so it should reward you with *more* than the easy, sellable-anytime stock market — and PME is the cleanest way to check whether it truly did.
Also called: PME
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