Public market equivalent (PME) for private funds

In this lesson

Terms: Public market equivalent (PME), IRR, TVPI, Gross and net returns, Denominator effect
To work through: a worked example, a 32-second film, 3 check questions

Underlined terms show their definition when you rest on them or tap them.

IRR and multiples say how a fund did, not whether it was worth the illiquidity and fees. The natural yardstick is the public market. But a fund’s IRR cannot simply be set beside an index’s yearly return, because the fund’s money went in and came out at irregular times.

A public market equivalent (PME), public market equivalent, fixes that by using the fund’s own cash flows. Every time the fund calls money, the PME buys the index with the same amount on the same date; every time the fund pays out, the PME sells. At the end, the result in the index is set beside the result in the fund.

There are several versions. Cambridge Associates’ modified PME (mPME) buys index shares with each capital call and sells the same proportion of them as the fund distributes, so the index position can never go negative, and reports the difference from the fund as value-add. Another common version, from the academic work of Steven Kaplan and Antoinette Schoar, expresses it as a ratio: what the investor earned after fees against what the same money would have earned in the index, a market-adjusted multiple. Above 1.0, the fund beat the index.

Two choices drive the answer: which index is used (a large-company index and a small-company index can give different answers for the same fund) and whether the fund figures are net of fees and carry. Read a PME with both stated.

Worked example: the idea in one stepRound, invented numbers

A fund calls $100 million at the start and returns $180 million five years later. Over the same five years the index rose 50%.

The fund turns $100m into	$180 million
The same $100m in the index becomes	$150 million
Fund ÷ index result	1.2
Verdict	The fund beat the index

With one call and one payout this is all a PME is. Real funds have dozens of cash flows, which is why the method matters. Simple example.

Key takeaway: why it matters to investors

Private funds ask investors to give up liquidity for a decade. PME is the honest test of whether that paid: whether the fund beat what the same money, on the same dates, would have earned in public markets.

Watch · 32 seconds

A fund’s return means little until you compare it to the market

The public market equivalent, or PME, compares a private fund with a stock index by pretending each of the fund's capital calls bought the index and each distribution sold it. If the fund beat that pretend portfolio, it beat the market with the same timing.

Check yourself

0 of 3 answered

Pick an answer to see why. Answer all 3 to finish the lesson.

1.Why can’t a fund’s IRR simply be set beside an index’s annual return?
2.A fund turns $50 million into $90 million. The same cash flows in the index end at $100 million. What does that say?
3.Which choice most changes a PME result?

3 questions left to finish the lesson.

Tip: the ← and → keys move between lessons.

Sources

The facts in this lesson were checked against these public pages on November 10, 2026. Examples use round invented numbers. Simple examples; terms vary by fund.

A Framework for Benchmarking (2014, updated November 2025), Cambridge Associates. Quartile rankings against peers of similar vintage and strategy, based on IRR; mPME buys index shares with capital calls and sells them in the same proportion as the fund’s distributions, avoiding a negative NAV, and compares the results as value-add.
Reassessing Private Equity (October 2012), Chicago Booth Review. The public market equivalent (Kaplan and Schoar) as a ratio of what a private equity investor earned after fees to what an equivalent public market investment would have earned: a market-adjusted multiple.

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