Making sense of PMEs

by Michael Roth

The private equity industry has always had its own way of measuring performance. Unlike a mutual fund, investors are committing to a blind pool of capital where GPs have discretion over the timing of inflows and outflows. This is why there is a difference in how you measure performance between a private equity fund and an equity mutual fund. Analyzing multiples of invested capital and IRRs – as opposed to a time weighted rate of return on public markets – allows investors to analyze a fund’s performance relative to its peers. However, if you are looking to compare a private equity fund’s performance to the public markets, you need to calculate a public market equivalent (“PME”) return measure. There are five main PME methodologies: