hard · Private Equity & LBOs
An LP wants to compare a buyout fund's realized performance against what it would have earned investing the same cash flows in a public index, using a public market equivalent (PME) approach. The fund called and distributed capital irregularly over its life and ended with a small residual NAV.
Which statement best captures a genuine methodological subtlety that distinguishes the Kaplan-Schoar PME from a simple IRR or TVPI comparison?
- KS-PME discounts each fund cash flow by the public index's total return over the matching period, expressing fund value as a ratio to the index outcome, so it controls for both market timing and the opportunity cost of capital that an IRR or TVPI ignores
- KS-PME is simply the fund IRR minus the index IRR, so a positive value means outperformance and the residual NAV can be ignored because it is unrealized
- KS-PME replaces the fund's actual distributions with the index's distributions, which is why it always understates the value of a fund that returned capital early
- KS-PME requires reinvesting every distribution back into the index at the original commitment date, making it mathematically identical to TVPI when the index return is zero
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