hard · Private Equity pe-core

Which statement best captures a genuine methodological subtlety that distinguishes the Kaplan-Schoar PME from a simple IRR or TVPI comparison?

1. 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
2. KS-PME is simply the fund's IRR minus the public index's IRR measured over the exact same period, so a positive value already means outperformance, and any residual NAV can be safely ignored entirely since it remains unrealized paper value on the books
3. KS-PME replaces the fund's actual contributions and distributions entirely with the public index's own hypothetical cash flows occurring on those exact same dates, which is exactly why it always understates a fund that returned capital early to its investors
4. KS-PME requires reinvesting every single distribution straight back into the public index at the fund's original commitment date, which effectively makes it mathematically identical to TVPI whenever the index's own realized return happens to be zero

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