Public market equivalent (PME): Definition and calculation

What is the public market equivalent?

The public market equivalent (PME) is a financial metric used to compare the performance of venture capital or private equity investments to a public market benchmark, such as the S&P 500 or Russell 2000. 

PME provides investors, fund managers, and fund CFOs with a standardized way to assess whether their private market investments have outperformed or underperformed an equivalent investment in public equities. 

By simulating how private equity cash flows would have performed if invested in a public index, PME offers a direct, apples-to-apples comparison that brings greater transparency to private fund performance measurement.

How to calculate the public market equivalent

To calculate PME, you align each VC or PE fund cash flow—both contributions ( capital calls) and distributions (returns to investors)—with the value of a chosen public market index on the same date. Each cash flow is then adjusted by the index’s performance from the cash flow date to the end of the analysis period. 

PME methodologies

The most widely used PME method is the Kaplan Schoar PME, which is calculated as the ratio of the sum of all distributions (and any remaining value) adjusted by the index’s growth, divided by the sum of all contributions similarly adjusted. 

The KS-PME formula is:

PME = (Sum of discounted distributions + residual value) / (Sum of discounted contributions)*

*where each cash flow is multiplied by the growth factor of the public index from its date to the end date.

Other PME methodologies include:

• Long-Nickels PME (LN-PME): Compares the value of private fund cash flows to hypothetical public investments, using the same time period and amounts.

• PME+: Adjusts for negative ending balances by scaling distributions, providing more realistic results in certain scenarios.

• Modified PME (mPME): Used by Cambridge Associates to reinvest net cash flows at the public index rate.

• Direct Alpha: Converts PME results into an annualized outperformance figure, making it easier to compare with a fund’s internal rate of return (IRR).

Benchmarking investment performance

A PME ratio greater than 1 indicates the private market investment outperformed the public benchmark, while a ratio of less than 1 means it underperformed. 

This approach helps investors and fund managers objectively evaluate the value added by investment strategies, taking into account the timing and magnitude of cash flows relative to public market movements. PME is especially useful for benchmarking investment performance, informing asset allocation decisions, and communicating performance metrics transparently to stakeholders.