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FRM Part II · FRM Exam Part II · Private Markets Investing

A pension fund compares a private equity fund with the MSCI World index using the Kaplan-Schoar PME. The future value of the fund's distributions plus ending NAV, each compounded by the index return from its date, is USD 135 million. The future value of capital calls, compounded the same way, is USD 150 million. What is the KS-PME and its interpretation?

The KS-PME is 0.90, found by dividing the index-compounded value of distributions and NAV, 135, by the index-compounded value of capital calls, 150. Because it is below 1, the fund underperformed the public index on a cash-flow-matched basis.

  1. A1.11; the fund outperformed the index
  2. B0.90; the fund underperformed the indexCorrect
  3. C0.90; the fund outperformed the index
  4. D1.11; the fund underperformed the index

Explanation

KS-PME = FV of distributions plus NAV / FV of contributions = 135/150 = 0.90. A value below 1 means the investor would have done better investing the same cash flows in the index. The 1.11 results invert the ratio.

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