Public market equivalent (PME) analysis asks the question IRR and multiples dodge: would the investor have done better putting the same cash flows into public markets? By replicating a fund’s actual capital calls and distributions against an index, PME measures whether the private fund earned its illiquidity.
How PME works
The intuition: every capital call becomes a hypothetical purchase of the chosen index; every distribution becomes a hypothetical sale; the comparison of ending values answers the opportunity-cost question directly. The most-used formulation, Kaplan-Schoar PME, expresses it as a ratio — discounted distributions plus residual value over discounted contributions, using index returns as the discount rate — where above 1.0 means the fund beat the index on its own cash-flow schedule (a KS-PME of 1.15 ≈ 15% more wealth than the index alternative) and below 1.0 means the illiquidity wasn’t paid for. Variants (Long-Nickels, mPME) engineer the same idea differently. The choices that shape conclusions: index selection is half the analysis — small-cap or levered benchmarks flatter or punish differently than the S&P 500, and honest PME work shows sensitivity across indices; residual NAV enters the calculation, importing the usual RVPI mark-quality caveat for young funds. Why it belongs in an advisor’s vocabulary even if they never compute one: PME is the institutional standard for the “why not just index?” question — asset-class studies framed in PME terms are how the private-equity-versus-public-markets debate is actually conducted — and requesting PME analysis (with the index named) from sponsors and platforms is a legitimate, increasingly answered ask. A fund with a strong IRR, a fine multiple, and a PME under 1.0 has told you exactly what its fees bought.
Related terms
MOIC · DPI · Benchmark · Vintage Year · RVPI
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