Private Capital Outperformance if:
Value > 1
Description of Calculation:
Calculated by discounting the private capital fund cash flows by the public market index value.
The discounted distributions plus the
current remaining value are divided by
the discounted contributions to obtain the ratio.
KS PME
(Kaplan-Schoar)
Metric:
Ratio
LN PME
(Long-Nickels)
Metric:
Annualized Rate
Capital Dynamics
PME+
Metric:
Annualized Rate
Direct Alpha
Metric:
Annualized Rate of Excess Return
Strengths:
The calculation looks at the ratio of outflows vs. inflows as opposed to generating an IRR, which is time dependent and easily manipulated.
Easy to interpret.
Weaknesses:
Ignores the timings of cash flows.
Private Capital Outperformance if:
Estimated PME IRR < Private Capital Fund IRR
Description of Calculation:
Contributions to the private capital fund are converted to an equal purchase of shares in the public index. Distributions represent liquidation
of share in public index.
IRR calculation uses the same contributions and distributions as the private capital fund, but with a different final period remaining value
Strengths:
LN PME IRR is directly comparable to the PE Fund IRR, allowing an apples-to-apples comparison.
Weaknesses:
IRR sensitive to early distributions. Large distributions
could cause a negative PME final period remaining value, making PME IRR calculation computationally impossible
Benchmark Methodology
Private Capital Outperformance if:
Estimated PME IRR < Private Capital Fund IRR
Description of Calculation:
Uses a fixed scaling factor (lambda) to modify each distribution to ensure the PME final period remaining value is the same as the private capital fund remaining value. IRR calculation uses modified contributions and distributions but with the same final period remaining value.
Strengths:
As for LN PME, with the added benefit of avoiding a final period negative remaining value, making PME IRR calculation possible in more cases.
Weaknesses:
PME+ does not match the cash
flows perfectly.
Private Capital Outperformance if:
Direct Alpha > 0
Description of Calculation:
Calculated by discounting the private capital fund cash flows by the public market index value. IRR calculation uses the discounted values to obtain the annualized rate of excess return.
Strengths:
Calculates the exact rate of return of outperformance, rather than an indirect estimate
Weaknesses:
N/A
KS PME
(Kaplan-Schoar)
Metric:
Ratio
LN PME
(Long-Nickels)
Metric:
Annualized Rate
Capital Dynamics
PME+
Metric:
Annualized Rate
Direct Alpha
Metric:
Annualized Rate of Excess Return