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An Analysis of North America-Focused Buyout Fund Performance against the Public Market (PME+)

by Chloe Wong

  • 29 Sep 2015
  • PE

An alternative measure available to investors to gauge the performance of their investments in private equity funds is the Public Market Equivalent (PME) index, which compares the performance of a private equity fund, or group of funds, against a public benchmark, such as the S&P 500. Investors may find the PME index more contextual than comparing net IRRs of funds within their peer group because it provides an indication of whether the right decision was made to invest in the asset class with regards to achieving the highest return. Preqin’s PME Index tool currently offers three different methodologies for evaluating the performance of private equity funds against a public market: KS PME, Long Nickels and PME+. This blog will investigate the performance of North America-focused buyout funds using PME+.

PME+ uses cash flows of private equity funds to create a theoretical PME vehicle to produce an IRR measure of the public market. PME+ keeps the final Net Asset Value (NAV) of the PME vehicle the same as the private equity fund and adjusts the distributions achieved over the life of the private equity fund.

Using since inception cash flow data for 325 North America-focused buyout funds with vintages 2000-2011, the above chart gives a breakdown by vintage year of the PME+ values using the S&P 500 total return index and Preqin’s Median Net IRRs. As a whole, the data shows that North America-focused buyout funds have generally outperformed the S&P 500 across the given time period. The greatest outperformance is observed by 2001 vintage funds, where the Preqin median net IRR for North America-focused buyout funds is 23% compared with a PME+ value of 7%. For North America-focused buyout funds which made their first investment during the height of the 2008 financial crisis, their performance is exactly the same as if the same cash flows had been invested in the S&P 500; but for funds of the most recent vintage years, 2010 and 2011, investors would have achieved a better return if they had invested in the public market, given the long-term nature of private equity.

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