The Public Market Equivalent and Private Equity Performance

We show that the public market equivalent (PME) approach [Kaplan and Schoar (2005)] is equivalent to assessing the performance of PE investments using Rubinstein's dynamic version of the capital asset pricing model [Rubinstein (1976)]. Two insights follow. First, we do not have to compute betas of PE investments, and any changes in PE cash flow betas due to changes in financial leverage, operating leverage, or the nature of the businesses are automatically taken into account. Second, the public market index used in evaluations should be the one that best approximates the wealth portfolio of the investor who is considering the PE investment opportunity.