The Public Market Equivalent and Private Equity Performance
21 Pages Posted: 2 May 2013 Last revised: 11 Nov 2019
Date Written: September 22, 2013
We provide a formal and rigorous justification for the Kaplan and Schoar (2005) public market equivalent (“PME”) measure of historical performance of private equity (“PE”) funds. The PME provides a valid economic performance measure when the investor (“LP”) has log-utility preferences and the return on the LP’s total wealth equals the market return. Notably, the PME is valid regardless of the risk of PE investments, and it is robust to variations in the timing and systematic risks of the underlying cash flows along with potential GP manipulations. Formally, we show that the PME is a generalized method-of-moments estimator using the stochastic discount factor implied by Rubinstein (1976)’s version of the capital asset pricing model.
Keywords: Private equity, public market equivalent, PME, log utility CAPM, ex-post performance evaluation, generalized method of moments
JEL Classification: G12, G23, G24, G31
Suggested Citation: Suggested Citation