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What are the advantages and disadvantages of the Public Market Equivalent measure in private equity? Why is it that the volatility of the cash flows do not matter? This topic has been discussed in a paper by Sorensen and Jagannathan 2013, but I can't seem to understand the logic behind it.

Thanks!

Probilitator
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finstats
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  • Perhaps you should explain what the PME is ;) - also note that the original paper on the PME can be found here: http://www.mit.edu/~aschoar/KaplanSchoar2005.pdf – Probilitator Mar 07 '14 at 13:08
  • Could you also clarify what you don't understand exactly. Is it the entire condept of the PME or just the proof/validation the authors are tryint to give ? – Probilitator Mar 07 '14 at 14:54
  • The PME has been recently commended as a more suitable performance measure than the IRR for private equity investments. While the IRR does not take into account the riskiness of an investment, the authors argue that the risks of the cash flows under the PME method do not matter. This is what i am confused about. Why doesn't the riskiness of the cash flows affect the calculation of the PME? I understand how to calculate it. – finstats Mar 09 '14 at 12:27
  • Roland - Thank you for the clarifiation :) now I know what to look for – Probilitator Mar 09 '14 at 13:04

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