Kaplan-Schoar Public Market Equivalent

A TVPI of 1.5 sounds good. But if the stock market doubled over the same years, the investor would have done better buying an index fund. A private fund's performance needs a public yardstick, and the awkward part is that the fund's money went in and came out on irregular dates.

The Kaplan-Schoar Public Market Equivalent solves this by asking a simple question: what would each capital call and each distribution have been worth had it sat in the market index until the valuation date?

It compounds every call and every distribution at the index's actual returns up to the valuation date, adds the fund's remaining NAV, and computes a TVPI on those market-adjusted figures. The workbook describes the result as "nothing but the measurement of market adjusted TVPI". Greater than 1: the AIF outperformed the market. Less than 1: it underperformed.

The workbook's Illustration 6.4, figures in Rs crore:

Step 1 — compound the calls to the valuation date. The Y0 call is carried through all five years: 20 × 1.18 × 1.14 × 1.16 × 1.22 × 1.17 = 44.55. The Y1 call is carried through four: 30 × 1.14 × 1.16 × 1.22 × 1.17 = 56.63. Together, (B) = 101.18.

Step 2 — compound the distributions and add NAV. The distribution of 20 arrives at Y4, the valuation date, so it stays 20. Adding the NAV of 120 gives (A) = 140.

Step 3 — divide. KS-PME = 140 ÷ 101.18 = 1.38. The workbook's conclusion: the AIF "has performed significantly better than the market".

The method needs three sets of dates — capital calls, distributions and the valuation date — and the index returns between them.

KS-PME = (Sum of future value of distributions + NAV) / Sum of future value of capital calls

Future value = cash flow compounded at the market index return
               from its own date to the valuation date

Illustrative figures. Narmada Opportunities Fund calls Rs 50 crore in Y0 and Rs 50 crore in Y1, distributes Rs 30 crore in Y3, and reports an NAV of Rs 110 crore at the end of Y4. The Nifty-based benchmark returns 12%, 8%, 15%, 10% and 14% in Y0 to Y4.

Following the workbook's convention:

FV of Y0 call = 50 x 1.12 x 1.08 x 1.15 x 1.10 x 1.14 = 87.22
FV of Y1 call = 50 x 1.08 x 1.15 x 1.10 x 1.14       = 77.87
Sum of FV of calls (B)                                = 165.09

FV of Y3 distribution = 30 x 1.10 x 1.14              = 37.62
Add NAV                                               = 110.00
Sum (A)                                               = 147.62

KS-PME = 147.62 / 165.09                              = 0.89

The fund's own TVPI is (30 + 110) ÷ 100 = 1.40, which looks healthy. But its KS-PME is 0.89 — below 1. Had the same Rs 100 crore gone into the index on the same dates, it would have been worth more. The fund made money; it did not beat the market.

Chapter 6 (Risk and Return — Investor and Fund Perspective) sets out KS-PME at 6.6.7, straight after the TVPI, and follows it with Direct Alpha at 6.6.8, which reuses the same illustration. The summary table at the end of 6.6.8 places KS-PME as the market-adjusted total-return measure. Expect a question on the interpretation (above or below 1), on what is compounded (calls and distributions, at market returns, to the valuation date), and on its relationship to TVPI.

• KS-PME is a ratio, not a percentage return. 1.38 does not mean 38% a year; it means the fund's market-adjusted value is 1.38 times the market-adjusted cost.
• The threshold is 1, not 0. Below 1 is underperformance even if the fund's own TVPI is well above 1.
• NAV is added to the numerator uncompounded — it is already a valuation-date figure. So is a distribution that falls on the valuation date.
• It compounds at market returns, not at the fund's IRR or at a hurdle rate.
• KS-PME is a total-return measure; Direct Alpha is its rate-of-return twin. The workbook describes Direct Alpha as a slight variation that expresses the out- or under-performance as a percentage.
• It benchmarks against listed markets. The workbook introduces it precisely as the method that satisfies the need for a listed-market benchmark for an AIF.