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

An investment committee compares a private equity fund's performance with a public index using the Kaplan-Schoar PME. The fund's contributions, discounted at the index return, have a future value of USD 120 million, and its distributions plus ending NAV, similarly adjusted, have a future value of USD 138 million. How should the result be interpreted?

The Kaplan-Schoar PME is 138 divided by 120, or 1.15. A value above 1 means the fund outperformed the public index once cash flows are adjusted for the index's returns over their timing. It is a ratio, not an annual excess return.

  1. APME of 1.15; the fund outperformed the index after adjusting for the timing of cash flowsCorrect
  2. BPME of 0.87; the fund underperformed the index
  3. CPME of 1.15; the fund matched the index because PME above 1 implies equal returns
  4. DPME of 18.0; the fund outperformed by 18 percentage points annually

Explanation

KS-PME = adjusted distributions / adjusted contributions = 138/120 = 1.15. A value above 1 means the investor would have been better off in the fund than in the index. Option B inverts the ratio. PME is a ratio, not an annual percentage-point excess return.

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