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Public Market Equivalent
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Public Market Equivalent
The public market equivalent (PME) is a collection of performance measures developed to assess private equity funds and to overcome the limitations of the internal rate of return and multiple on invested capital measurements. While the calculations differ, they all attempt to measure the return from deploying a private equity fund's cash flows into a stock market index.
The first PME measure was proposed by Austin M. Long and Craig J. Nickels in 1996.
The analysis is referred in the industry as Long Nickels PME, LN-PME, PME, or ICM. Long and Nickels stated that they preferred the acronym ICM (Index Comparison Method):
The ICM is also known as the Public Market Equivalent (PME). We prefer the term ICM, because it better describes the methodology, which is not limited to the use of a public market index to calculate its results
The PME analysis is covered under US patent 7058583
Long and Nickels compared the performance of a private equity fund with the S&P500 Index by creating a theoretical investment into the S&P using the Private Equity fund cashflows :
As the index price evolves, the value of the theoretical amount invested in the index changes. When receiving a valuation for the fund, we can then compare the value of the fund investment to the theoretical value of the index investment.
Negative cashflows are treated as contributions. On the first period, a $100 call in the fund is matched by a $100 investment into the index. On the second period, the $100 index investment is now worth $105, to which is added $50 of new investment. A positive cashflow is treated by decreasing the index investment by the same value. On the valuation period, we compare the valuation received from the fund to the value of the theoretical investment. The PME IRR is obtained by computing an IRR with the index valuation as the final cashflow.
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Public Market Equivalent
The public market equivalent (PME) is a collection of performance measures developed to assess private equity funds and to overcome the limitations of the internal rate of return and multiple on invested capital measurements. While the calculations differ, they all attempt to measure the return from deploying a private equity fund's cash flows into a stock market index.
The first PME measure was proposed by Austin M. Long and Craig J. Nickels in 1996.
The analysis is referred in the industry as Long Nickels PME, LN-PME, PME, or ICM. Long and Nickels stated that they preferred the acronym ICM (Index Comparison Method):
The ICM is also known as the Public Market Equivalent (PME). We prefer the term ICM, because it better describes the methodology, which is not limited to the use of a public market index to calculate its results
The PME analysis is covered under US patent 7058583
Long and Nickels compared the performance of a private equity fund with the S&P500 Index by creating a theoretical investment into the S&P using the Private Equity fund cashflows :
As the index price evolves, the value of the theoretical amount invested in the index changes. When receiving a valuation for the fund, we can then compare the value of the fund investment to the theoretical value of the index investment.
Negative cashflows are treated as contributions. On the first period, a $100 call in the fund is matched by a $100 investment into the index. On the second period, the $100 index investment is now worth $105, to which is added $50 of new investment. A positive cashflow is treated by decreasing the index investment by the same value. On the valuation period, we compare the valuation received from the fund to the value of the theoretical investment. The PME IRR is obtained by computing an IRR with the index valuation as the final cashflow.