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A manager can pick assets well and still hand limited partners a mediocre outcome. In the Gross IRR vs Net IRR comparison, gross IRR captures the annualised return on the underlying investments before management fees, fund expenses and carried interest, while net IRR captures what the limited partner keeps after those deductions. PipelineRoad puts the spread between the two at roughly 500 to 800 basis points for a standard 2% management fee and 20% carry structure, although the figure moves with fee base, fund size and exit timing. The analysis sits in that gap: deciding whether the difference reflects the fair cost of accessing a strong investment programme or the drag of an expensive structure with slow deployment.
| Dimension | Gross IRR | Net IRR |
|---|---|---|
| Perspective | GP and deal performance | LP investor outcome |
| Cash-flow basis | Investment or portfolio-company cash flows | Fund-to-investor cash flows |
| Management fees | Excluded | Deducted |
| Carried interest | Excluded | Deducted per the waterfall |
| Fund expenses | Excluded | Deducted |
| Primary use | Deal attribution, investment skill, track record | Allocation decisions, manager comparison, LP reporting |
| Main limitation | Says nothing about what LPs receive | Blurs raw deal performance across different fee structures |
Both numbers use the same mechanic. IRR is the discount rate that sets the net present value of a cash-flow stream to zero, with outflows negative and inflows positive. The difference is which cash flows you feed into it.
Gross IRR runs on deal-level cash flows. Capital deployed into portfolio companies is the outflow. Exit proceeds, dividends, recapitalisation proceeds, interest income and the current fair value of unrealised positions are the inflows.
Management fees, organisational costs, fund expenses and carry are stripped out. What remains is a read on deal selection, value creation and the timing of entries and exits.
That makes gross IRR the right tool for attribution. If you want to compare two buyout teams operating in the same sector, or test whether a manager’s stated value-creation plan translated into realised returns, gross figures isolate the investment decision from the fee structure wrapped around it.
The term needs qualification on every use. Gross IRR can be calculated at individual deal level, across a portfolio, or at fund level before fee deduction. These are different numbers, so track records that blend the three without saying so are not comparable to anything.
Net IRR is built from the cash flows between the fund and the investor. Capital calls and fees are outflows, while distributions and remaining net asset value for unrealised positions are inflows.
Three costs create the deduction. Management fees are charged on either committed or invested capital depending on the partnership agreement. Fund expenses cover audit, legal, administration and deal costs. Carried interest is the GP’s share of profits, usually payable only after the LP clears a preferred return or hurdle.
Net IRR will sit below gross IRR in almost every case because it absorbs costs the gross figure ignores. It is the only figure that answers whether an allocation paid off.
Take a fund reporting 25% gross IRR under a 2-and-20 structure. PipelineRoad’s illustration puts the resulting net figure at roughly 18% to 19%, with the precise outcome depending on deployment pace, hold periods, exit timing and whether fees are charged on committed or invested capital. Treat that as approximate rather than formulaic.
The ranking problem is sharper. Transacted’s comparison gives Firm A a 25% gross IRR and 15% net IRR, against Firm B at 20% gross and 18% net. Firm A picked better assets. Firm B delivered a better investor result.
An LP screening on gross figures backs the wrong manager. An LP screening on net alone learns nothing about why the spread is wide, which matters when negotiating terms for the next fund.
The spread is an output of fund economics rather than a fixed percentage. These variables move it most:
A wide spread is not automatically a red flag. A manager producing 30% gross with a 22% net is charging heavily but delivering. A manager producing 18% gross with a 9% net is charging heavily and not delivering.
Subscription credit facilities let a fund draw on a bank line to close deals and call LP capital later. The investment starts working immediately, while the LP’s money leaves later. Net IRR measured from the capital call date therefore benefits from the delay, even though the underlying asset performed identically.
That creates a methodology trap. An investment-level gross IRR that ignores subscription facility effects is not comparable to a fund-level net IRR that includes them.
ACA Global, summarising an SEC Division of Investment Management FAQ on the Marketing Rule, states that advertisements showing gross performance must also show net performance with equal prominence, in a comparable format, over the same period and using the same methodology. ACA’s reading is that presenting gross IRR excluding subscription facility impact alongside only a net IRR including that impact would breach the rule. Where investment-level gross IRR without subscription line effects is shown, ACA says investment-level net IRR on the same basis should appear alongside it. This is a summary of staff guidance, not legal advice, and advisers should take their own compliance view.
LPs anchor on net IRR and then interrogate the spread. The diligence question is whether the fee load is proportionate to the gross return being generated and whether the waterfall pays carry only on genuine outperformance.
GPs use gross IRR to evidence investment skill in fundraising materials and should expect net performance to be scrutinised alongside it. A strong gross track record that has never converted into competitive net returns invites questions about fee base, deployment discipline and expense management.
Investment bankers and corporate finance teams use deal-level IRR to frame exit timing and transaction attractiveness, where the fee layer is irrelevant to the underlying value case. Private credit and asset management teams need net-of-fee comparisons when weighing commingled funds against separately managed accounts or BDC structures, because the fee load differs sharply between wrappers.
IRR is timing-sensitive by construction. A quick exit in year one produces a high IRR on a small absolute gain. A longer hold delivering three times capital can show a lower IRR while creating far more value. IRR also makes comparison across projects of different duration misleading.
Neither gross nor net IRR shows dollar magnitude, and neither distinguishes realised cash from unrealised NAV marks. Read IRR alongside:
A fund reporting 20% net IRR with a DPI of 0.3x is largely telling you about its own valuations.
When building the analysis, run separate cash-flow schedules. One should cover investments, including purchases, follow-ons, dividends, recapitalisation proceeds, exits and fair value. The other should cover LP economics, including calls, fees, expenses, carry and distributions. A bridge between them, splitting the spread into fee drag, expense drag and carry drag, tells you where the return went.
Gross IRR and net IRR answer different questions, and the useful judgement is whether the distance between them is earned. A manager with strong deal performance and an expensive structure can underperform a cheaper competitor with modest gross returns, which is why gross figures on their own are an unreliable basis for allocation.
Get the reconciliation wrong and the error compounds across a ten-year fund life with no mechanism to correct it. Fee base, hurdle design and subscription facility treatment are negotiated once, at closing, and then govern every dollar that reaches the LP.
P.S. If return analysis and manager diligence are part of your job, check out our Premium Resources for fund models, Excel skill tests and more tools to help you advance your career.
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