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Pro Tips

Public Market Equivalents

In this article

Placing managers and funds on a level playing field can be a real challenge, given the range and volume available. In addition, the range of benchmarks used for funds can be wide, with many unlikely to be used by the LPs selecting managers.
In the past, LPs looked to the public markets, or their equivalents, to drill down into fund manager performance. These PME (public market equivalents) have been a useful measure of manager contribution to performance.

Preqin Pro
provides benchmarking tools with PME methodologies built-in, covering a range of applicable indices.



PME Data



Preqin Pro currently has four distinct methodologies for you to choose from:

  1. Direct Alpha

  2. Kaplan-Schoar PME (KS-PME)

  3. Long-Nickels PME (LN-PME)

  4. PME+


Within those methodologies you have the option to compare against a list of indices. These include: S&P 500, Russell 2000, Russell 3000, MSCI Emerging Markets, MSCI Europe Standard, MSCI US REIT, and the MSCI World indices.

It is important to note that we use total return market indices as these re-invest dividends back into the index, in the same way an investor would redirect its distributions from private equity funds into other investments.

Below are suggestions of which indices to use with which fund types/regions:

  • S&P 500 (primarily used for large-cap US stocks) → All PE, Buyout

  • Russell 2000 (widely used for small-mid cap) → Venture Capital

  • Russell 3000 (largest 3000 US stocks) → Buyout, Distressed PE, Fund of Funds

  • MSCI Europe → Europe-focused PE funds

  • MSCI Emerging Markets → Emerging markets-focused PE funds

  • MSCI US REIT → Real Estate

  • MSCI World → All


Interpreting PME Indices



Typically, private capital returns are not directly comparable with public market indices, due to the illiquid nature and irregular timing of cash flows for private capital assets. The development of the public market equivalent (PME) measure of returns, however, provides a more meaningful, like-for-like comparison. PME metrics benchmark the performance of a fund, or a group of funds, against an appropriate public market index while accounting for the timing of fund cash flows.

The table below outlines the calculations involved in each of the four PME methodologies offered, and their advantages and disadvantages:

Benchmark MethodologyMetricPrivate Capital
Outperformance if:
Description of CalculationStrengthsWeaknesses
KS PME
(KaplanSchoar)
RatioValue > 1Calculated by discounting the private
capital fund cash flows by the public
market index value.
The discounted distributions plus the
current remaining value are divided by
the discounted contributions to obtain
the ratio.
The calculation
looks at the ratio
of outflows vs.
inflows as opposed
to generating an
IRR, which is time
dependent and
easily manipulated.
Easy to interpret.
Ignores the
timings of cash
flows.
LN PME
(LongNickels)
Annualized
Rate
Estimated PME
IRR < Private
Capital Fund IRR
Contributions to the private capital
fund are converted to an equal
purchase of shares in the public index.
Distributions represent liquidation of
share in public index.
IRR calculation uses the same
contributions and distributions as
the private capital fund, but with a
different final period remaining value.
LN PME IRR is
directly comparable
to the PE Fund
IRR, allowing an
apples-to-apples
comparison.
IRR sensitive
to early
distributions.
Large
distributions
could cause a
negative PME
final period
remaining value,
making PME
IRR calculation
computationally
impossible.
Capital
Dynamics
PME+
Annualized
Rate
Estimated PME
IRR < Private
Capital Fund IRR
Uses a fixed scaling factor (lambda)
to modify each distribution to ensure
the PME final period remaining value
is the same as the private capital
fund remaining value. IRR calculation
uses modified contributions and
distributions but with the same final
period remaining value.
As for LN PME, with
the added benefit
of avoiding a final
period negative
remaining value,
making PME IRR
calculation possible
in more cases.
PME+ does not
match the cash
flows perfectly.
Direct AlphaAnnualized
Rate of
Excess
Return
Direct Alpha > 0Calculated by discounting the private
capital fund cash flows by the public
market index value. IRR calculation
uses the discounted values to obtain
the annualized rate of excess return.
Calculates the exact
rate of return of
outperformance,
rather than an
indirect estimate.
N/A



Accessing PME Data



There are three ways to incorporate PME data into your benchmarking and fund performance analysis:

  1. Select Benchmarks > Private Capital Benchmarks in the top navigation and use the Public Market Equivalent drop-down above the table.

  2. Within a fund-level benchmark select Manage Columns. In the dialog box that opens you’ll find PME in the Performance tab.

  3. Select Search For > Performance and select Manage Columns. In the dialog box that opens you’ll find PME in the Performance tab.

Once applied, the data will automatically be added to your results table.




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