2. As the fund’s investments begin to mature and are exited, portions of its value are realized
and reflected in its DPI. In our example, the fund’s first exit took place in year 4, producing
a DPI of 0.20.
3. The share of the fund’s DPI continues to rise (and RVPI to fall) until all of its investments
have been exited, at which point all value has been realized and is captured by a fund’s
DPI. The final DPI reflects its cash-on-cash MoM. In our example, the fund generated a
cash-on-cash return of 1.75x for investors. It is important to note that the NAV fluctuates
over time (e.g. 185 at some point, but lower eventual realisations.)
Comparing PE with Public Equity Portfolios
LP investment committees often ask to compare PE funds’ performance with that of more
traditional asset classes, which is far from straightforward. Unlike listed or traded instruments,
much of PE’s performance reporting relies on interim valuations of unlisted and illiquid
investments (i.e. the components of a fund’s NAV), making precise “mark-to-market” impossible.
Furthermore, PE is dominated by outliers, which are difficult to “index”, and its risk-return patterns
are quite distinct from more traditional asset classes. It is challenging to gain broad (index-like)
exposure to PE, unlike public markets where building a diversified portfolio is quite
straightforward.
Moreover, the standard performance measures in PE – IRR and MoM – are not directly comparable
to liquid asset classes where valuations and returns are easily determined through a daily mark-to-
market. IRR takes into account the timing and size of cash flows, while public equity benchmarks
use time-weighted return measures. Despite the problem of comparing apples to oranges, attempts
have been made to arrive at a (somewhat) realistic comparison, as detailed below.
Public Market Equivalent (PME)
A frequently cited method is the public market equivalent (PME) approach, an index-return
measure that takes the irregular timing of cash flows in PE into account. PME compares an
investment in a PE fund to an equivalent investment in a public market benchmark (e.g. the S&P
500). Selecting the right index when using a PME method to find alpha is important, as different
indices can provide a completely different picture.
Below we describe the most commonly used PME methodologies.
Long-Nickels PME (LN PME): The first PME method was developed by Long and Nickels in
1996.