The Public Market Equivalent (PME) is the standard method for answering one of the most important questions in institutional investing: did this private equity fund outperform what I would have earned in public markets?
Unlike IRR, which measures a fund’s return in isolation, PME creates a direct comparison. It takes every capital call and distribution from a PE fund and simulates what would have happened if those same cash flows had been invested in a public index (typically the S&P 500 for US buyout, or the Russell 2000 for venture). If the PE fund generated more terminal wealth than the hypothetical public portfolio, the PME is above 1.0 and the fund beat the market.
How PME is calculated
The most widely used method is the Kaplan-Schoar PME (2005). The calculation discounts each capital call and distribution by the public market return over the same time period, then divides the present value of distributions by the present value of contributions. The result is a ratio:
- PME > 1.0: The PE fund outperformed public markets
- PME = 1.0: Equivalent performance
- PME < 1.0: Public markets would have been a better investment
There are several PME variants. The Long-Nickels PME (also called mPME or modified PME) addresses a technical issue where the Kaplan-Schoar method can produce negative values in certain scenarios. Direct Alpha, developed by Gredil, Griffiths, and Stucke, converts the PME into an annualized excess return figure, making it easier to compare across different fund vintages and holding periods.
Why PME matters for fundraising
For GPs raising capital, PME is increasingly the metric that matters most in LP due diligence. A strong IRR can be manufactured through subscription credit lines, early distributions on a few strong exits, or favorable timing. PME is harder to game because it benchmarks every cash flow against what the LP’s capital was actually worth in public markets at that moment.
Institutional LPs like CalPERS, the Yale Endowment, and sovereign wealth funds all track PME alongside TVPI and DPI when evaluating re-ups and new commitments. A GP with a 1.15x PME across two prior funds has a strong empirical case that they are generating real alpha over what an LP could earn passively.
The PME premium is compressing
Over 25-year periods, US buyout funds have delivered a median PME of approximately 1.15-1.25 against the S&P 500 (Cambridge Associates, Burgiss). This is the “illiquidity premium” that justifies locking up capital for 10+ years.
But recent data shows compression. The 5-year PME for buyout dropped to 1.05-1.12 as of 2024 (Bain & Company, 2025). This reflects a combination of elevated entry multiples (funds paying more for companies), slower exits (longer hold periods reducing IRR), and a public equity market that delivered 12-15% annualized returns over the same period. Whether private equity continues to justify its illiquidity premium at current prices is a central debate in every allocation committee meeting.
For emerging managers, this means the bar is higher. Institutional LPs are not looking for funds that merely beat public markets by a few hundred basis points. They want clear evidence of differentiated sourcing, operational value creation, or structural advantages that can sustain alpha even as the broader PE industry’s PME premium narrows.
Frequently Asked Questions
What does a PME above 1.0 mean?
A PME above 1.0 means the private equity fund outperformed an equivalent investment in the public market index. For example, a PME of 1.20 against the S&P 500 means the PE fund delivered 20% more wealth than if the same cash flows had been invested in the S&P 500.
How is PME different from IRR?
IRR measures a fund's annualized return in isolation. PME measures performance relative to what an LP would have earned by investing the same capital at the same times in a public index. A fund can have a strong IRR but a weak PME if public markets also performed well over the same period.
Which PME method do institutional LPs prefer?
Most institutional investors use the Kaplan-Schoar PME because it is intuitive and widely accepted. Some also reference the Long-Nickels PME (or mPME) and Direct Alpha, which adjust for different timing assumptions. Cambridge Associates and Burgiss both publish PME data alongside traditional performance metrics.
What is a good PME for private equity?
Historically, US buyout funds have averaged a PME of 1.15-1.25 against the S&P 500 over 25-year periods. This implies LPs earned 15-25% more than they would have in public equities. However, 5-year PMEs have compressed to 1.05-1.12 recently, reflecting elevated entry multiples and strong public market returns.
