Public market equivalent (PME)

Public market equivalent (PME) is a family of methods for comparing a private equity or venture fund's performance to how the same cash flows would have performed if invested in a public market index instead, addressing a gap that multiple on invested capital and even internal rate of return leave open: neither tells an investor whether the private fund actually beat a readily available public alternative.

The most common version, the Kaplan-Schoar PME, takes every capital call the fund made and every distribution it paid, invests and withdraws those same amounts from a chosen public index on the same dates, and compares the two resulting values, roughly PME = (index-invested value of distributions + remaining value) / (index-invested value of contributions). A PME above 1.0 means the private fund outperformed the public benchmark on a comparable cash-flow basis; below 1.0 means it underperformed. Other variants, such as direct alpha, convert the comparison into an annualized excess-return figure instead of a ratio.

PME matters because a private fund's raw internal rate of return or total value to paid-in says nothing about opportunity cost, and institutional investors use it to judge whether the illiquidity and fees of private markets were worth the return achieved versus simply buying a public benchmark index. A common pitfall is choosing a benchmark that does not match the fund's sector, geography, or risk profile, which can flatter or unfairly penalize the comparison.