Public Market Equivalent (PME) is a methodology designed to compare performance of an alternative investment fund against a public market benchmark. To do so, the historic cash flows into and out of the fund are mirrored by equivalent amounts invested into a public market index. Accordingly, drawdowns into the fund are matched with investments into the public market on the same date and distributions from the fund are matched with withdrawals from the public markets on the same date, based on the valuation of the index at that date. Finally, a comparison is made at the reporting date between the value that is left in the fund versus the value remaining in the public market equivalent.
In order to be a valid comparator such an index should be one based on re-investment of dividends.
The fundamental challenge for a Public Market Equivalent (PME) is finding an appropriate public index whose risk/return characteristics are relevant to the fund’s investment strategy. Where they are reported, details on the public index used should also be disclosed.