Kaplan-Schoar PME (Public Market Equivalent) is a standardized approach for evaluating private equity fund performance relative to public stock market returns. Developed by academics Steven Kaplan and Antoinette Schoar, this metric answers a critical investor question: Did this private investment actually beat what I could have earned by simply investing in an index fund?
The metric works by taking the cash flows from a private investment and calculating what value they would have generated if invested in a public market index like the S&P 500 on the same dates. It then compares this hypothetical public market result against the actual returns from the private investment.
How It Works
PME calculations follow this logic: whenever an investor puts money into a private fund, that same amount is assumed to be simultaneously invested in a public market benchmark. When the private fund distributes cash back, those proceeds are also invested in the benchmark. At the fund's end, you compare the final value of both scenarios.
The resulting PME ratio tells you the relationship between private and public returns. A PME of 1.2 means the private investment returned 20% more than the public market alternative. A PME of 0.9 means it underperformed by 10%. A PME of 1.0 means performance matched public markets.
Why It Matters for Investors
Angel investors and HNW individuals often face pressure from fund managers claiming strong returns. Without proper benchmarking, a 15% return sounds impressive—until you realize the S&P 500 returned 18% the same year. PME cuts through marketing claims and forces an honest comparison.
This matters because private investments lock up capital for years, often charge higher fees, and carry concentrated risk. The return premium must justify these costs. PME helps investors decide whether to commit capital to a private opportunity or accept lower but more accessible public market returns.
Example
Imagine you invest $1 million in a private equity fund in 2019. The fund returns $1.5 million in 2024. That's a 50% total return—excellent on paper. But if the S&P 500 returned 80% over that same period, your private investment underperformed. The PME would be approximately 0.62 (1.5M/2.4M), meaning you'd have been better off in an index fund.
Key Takeaways
- PME provides an apples-to-apples comparison between private and public market returns using the same time period and cash flows
- A PME above 1.0 indicates the private investment outperformed public markets; below 1.0 suggests underperformance
- PME is essential for evaluating whether private investments justify their illiquidity, fees, and concentration risk
- Use PME alongside other metrics like IRR and MOIC for comprehensive fund evaluation