The Public Market Equivalent and Private Equity Performance

22 Pages Posted: 1 Nov 2013 Last revised: 13 Jan 2016

See all articles by Morten Sorensen

Morten Sorensen

Dartmouth College - Tuck School of Business

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2014

Abstract

We provide a formal and rigorous justification for the Kaplan and Schoar (2005) public market equivalent (“PME”) measure of historical performance of private equity (“PE”) funds. The PME provides a valid economic performance measure when the investor (“LP”) has log-utility preferences and the return on the LP’s total wealth equals the market return. Notably, the PME is valid regardless of the risk of PE investments, and it is robust to variations in the timing and systematic risks of the underlying cash flows along with potential GP manipulations. Formally, we show that the PME is a generalized method-of-moments estimator using the stochastic discount factor implied by Rubinstein (1976)’s version of the capital asset pricing model.

Keywords: Private equity, public market equivalent, PME, log utility CAPM, ex-post performance evaluation, generalized method of moments

JEL Classification: G12, G23, G24, G31

Suggested Citation

Sørensen, Morten and Jagannathan, Ravi, The Public Market Equivalent and Private Equity Performance (March 7, 2014). Financial Analysts Journal, Vol. 71, No. 4, 2015, Netspar Discussion Paper No. 09/2013-039, Available at SSRN: https://ssrn.com/abstract=2347972 or http://dx.doi.org/10.2139/ssrn.2347972

Morten Sørensen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
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Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

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Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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