The Private Return Needs an Opportunity Cost
Public market equivalent, or PME, compares a venture fund with a public index. It uses the dates when the LP paid cash in and received cash back. This helps the LP judge whether the return was worth tying up its money and taking manager risk. The fund's IRR alone cannot show that.
Hamilton Lane's portfolio analysis illustrates the comparison with a 15% private-fund IRR. PME recreates the timing of that fund's cash flows in a public index, revealing whether the private return added value over the alternative available on the same dates.
How Calls and Distributions Enter the Comparison
If the fund calls $10 million, the PME model treats that date as a $10 million purchase of the selected public index. When the fund distributes cash, the model sells the corresponding public investment on that date. The remaining private NAV is then compared with the public position at the same endpoint.
This timing matters because an LP does not fund the entire commitment on day one. A broad stock-market return measured from the fund's inception would assume cash was invested when it was still sitting with the LP. Matching the dates removes that distortion.
Different PME Methods Answer Different Questions
Carta explains at least 3 PME approaches, including Kaplan-Schoar PME, PME+ and Direct Alpha. They treat distributions and ending value differently. The method's name gives the result meaning; “PME” alone leaves that basis unclear.
| Method | Output | Simple reading | Caution |
|---|---|---|---|
| Kaplan-Schoar PME | A ratio | Above 1.0 usually means private outperformance | Result depends on the index and cash-flow data |
| Long-Nickels PME | An IRR-like result | Compares private IRR with a synthetic public investment | Can create issues when distributions are large |
| PME+ | An adjusted public-market IRR | Scales distributions to avoid some Long-Nickels problems | Scaling adds another assumption |
| Direct alpha | An annualized spread | Estimates private return above or below the index | Still depends on method and index choice |
The Index Is Part of the Conclusion
A broad stock index may reflect what the LP could have bought instead. A technology-heavy index may better match a software fund, but it sets a different hurdle. A small-cap index may match company size yet hold very different sectors and levels of profit.
The index represents a chosen alternative, so it affects the answer. A second plausible benchmark reveals how sensitive the result is to that choice. Outperformance that disappears after a modest index change offers weaker evidence.
Why Unrealized Value Still Matters to the Ratio
Under the common Kaplan-Schoar interpretation, a 1.20x KS-PME means the venture fund created 20% more value than the chosen public benchmark. A 0.90x result means it lagged by 10% under that method.
A KS-PME below one means the private fund underperformed the selected public benchmark, one means in line, and above one means outperformed.
PME Interpretation Range
PME is only as useful as the benchmark and cash-flow data behind it.
View PME interpretation data
| KS-PME result | Interpretation | Caution |
|---|---|---|
| 0.90x | Fund lagged the selected public benchmark. | Benchmark, vintage and cash-flow differences may explain the shortfall. |
| 1.00x | Fund matched the selected public benchmark. | Does not show an illiquidity premium. |
| 1.20x | Fund exceeded the selected public benchmark by 20% under this method. | DPI, residual value and concentration affect how firm that result is. |
PME inherits uncertainty from the ending NAV. A young fund with little cash returned can appear to outperform based on marks that have never been tested by an exit. Fund age, DPI, RVPI and the dates of its largest valuations help explain how firm that result is.
PME compares the fund with a public market. A peer comparison answers whether it beat similar venture funds, while attribution explains where its gains came from. Together, these measures shed light on compensation for illiquidity and whether the manager's choices could work again.
Frequently Asked Questions
Which public index should LPs use?
The index depends on the comparison's purpose. A broad stock index can represent the LP's wider public-market alternative. A technology-heavy index may better reflect the market risks of a software venture fund.
Can PME be calculated before exits?
PME can be calculated while value remains unrealized, but the ending NAV is still an estimate. The comparison becomes more dependable as a larger share of the fund's value is converted into cash.