are the IFC’s investments in a company including the payment of management fees in the event the company is a fund.

Our measure of financial return is the public market equivalent, defined by Kaplan and Schoar (2005) as where _R_ ( _t_ ) is the realized total return of the market index from the year of the first cash flow ( _t_ = 0) to the time of the distribution or contribution ( _t_ ). Sorensen and Jagannathan (2015) motivate the PME as a method for evaluating the returns of an investor whose wealth is held in the index; if the ratio is greater than one, the investor prefers the portfolio to the index.<sup>11</sup> We use the S&P 500 index as a market reference to address the question of whether investment returns in emerging markets are comparable to those available to an investor in a high income country (e.g., the United States), and for comparability with the literature on private equity performance that has used the index as a benchmark. Index values are value-weighted including dividends, as reported by the Center for Research in Security Prices (CRSP).

Given this choice, the question naturally arises whether we should instead use an alternative benchmark that better matches a portfolio’s risk characteristics, such as an index of emerging market public equity or of private equity, for our preferred measure. There are several reasons we do not. First, the S&P 500 is the only index for which the time series is complete back to our first cash flow in 1961. When reporting portfolio performance, we do use the MSCI World index and the MSCI Emerging Markets index as alternatives, although these start later, in 1970 and 1988, respectively, and are much less diversified than the IFC portfolio. Index values are value-weighted including dividends, as reported by Bloomberg. Second, although consultancies like Cambridge Associates produce international private equity indices for the most recent period after 2000, the returns in these indices do not reflect the same country and sector allocations as the IFC. Moreover, they include only funds whose investors elect to report their performance to the consultancy. Our purpose in using the PME is not to assess whether the IFC portfolio outperforms an investor trying to replicate the same strategy—given available data it would be impossible to measure this counterfactual—but rather to correct for the time value of money and to compare performance to a public benchmark broadly agreed to provide a reasonable absolute return over the long run in a way that accounts for the irregular timing of payoffs in private equity transactions.

To summarize individual investment performance, Figure 2 plots, by decade of initial investment, the density of PME for direct investments (Panel A) and fund investments (Panel B). For purposes of the graph only, values above 3 were recorded as 3. Table A4 reports average and

> 11Sorensen and Jagannathan (2015) show the PME approach is equivalent to assessing the performance of private equity investments using Rubinstein’s dynamic CAPM. To assess performance, one need not compute betas of private equity investments, as long as the public market index used approximates the wealth portfolio of the investor considering the investment.

11