The final performance measure considered in this lesson is PME, which provides investors and fund managers with a method for benchmarking the returns of a private capital fund against the return of a chosen public market index.
Comparison to a public index allows both investors and fund managers to review the relative performance of their investments. For investors this is an important exercise, helping to inform portfolio allocation decisions and to evaluate the performance of one asset class against another. For fund managers this can form a key aspect of fund marketing activities, helping to showcase fund outperformance and to secure capital commitments from investors.
The key obstacle here, however, is that private capital returns are not directly comparable with public market indices due to the illiquid nature and irregular timing of cash flows. The industry often uses the analogy of ‘comparing apples with oranges’ in relation to this difficulty. To address the issue and provide a more meaningful, like-for-like comparison with the market, PME was developed.
PME metrics benchmark the performance of a fund, or a group of funds, against an appropriate public market index while accounting for the timings of fund cash flows. There are several variations of PME. Preqin’s PME tool enables the comparison of private capital returns against seven public market indices using a choice of three PME methodologies explored in more detail below: Kaplan-Schoar PME (KS PME), Long-Nickels PME (LN PME), and PME+. Click through the metrics below to find out the calculations involved in each of these PME methodologies, and their advantages and disadvantages: