Outperforming the public markets and the ability to speak intelligently about public market equivalent (“PME”) analysis is becoming a necessity in a GP’s investor relations conversations with LPs. Being unfamiliar with PME or saying “We don’t do PME” reveals a lack of sophistication and/or an indifference towards LP considerations. A GP needs to know the answers to questions like:
- Which PME method do you use?
- Why did you choose that index?
- What does PME analysis tell me?
I will dig in to each question in their own blog post, starting with which PME should I use.
Choosing a PME Method
We know of eight different PME methodologies. We understand the nuances and can walk through the specifics of each one. Frankly, the index IRRs of each methodology are often within 1% – 2% of each other. Despite this close proximity, we are partial to our own methodology, Bison PME. Why?
- Bison PME can be calculated in any situation
- It is the least prone to the shortcomings associated with the IRR calculation
- It is the most stable methodology
What do these points mean? In the image below, I have plotted the Russell 3000’s IRR using four different PME methods. For this analysis, I randomly selected 100 funds from our Bison funds dataset and sorted them by the Bison PME IRR. The Bison PME IRR for each fund is as of Q3 2015.
The illustration shows that GEM IPP and Direct Alpha are frequently in line with Bison PME. Meanwhile, Long Nickels shows that it is not a reliable PME methodology since it is frequently the outlier.
In the next piece, I will discuss how to choose a PME index.