Public Market Equivalents

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:

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.