Public market equivalent

A comparison of a private fund with a public index that invests the fund's own cash flows in the index, so both face the same timing. A ratio above 1, or a positive spread, means the fund beat the index.

Where you will meet it

Public market equivalent appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain why private-market results cannot be read like listed-market returns, and compute and interpret the paid-in multiples DPI, RVPI and TVPI and when each is useful
  CFA Level III · Private Markets Pathway

  “The GP controls when capital is called and returned, so private funds report money-weighted IRRs and multiples, not time-weighted returns, and comparing them with an index needs a public market equivalent (PME).”

• Discuss what to watch when overseeing an alternatives programme after it is in place
  CFA Level III · Portfolio Construction

  “Performance should be measured with money-weighted measures such as internal rate of return or public market equivalents for private funds, because managers control cash flow timing, and early results suffer from the J-curve.”

• Set out the difficulties that arise when choosing benchmarks for alternative investments
  CFA Level III · Performance Measurement

  “Private equity and real estate rely on appraisal values, which smooth returns, understate volatility and correlation, and lag market moves; cash flows are irregular and controlled by the manager, so money-weighted returns and comparisons such as a public market equivalent are used.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with P · Glossary