Comparison
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Gross IRR vs Net IRR
Quick Answer
Gross IRR measures a fund's investment performance before fees and carry are deducted. Net IRR is what LPs actually earn after the GP takes their management fees and carried interest. The gap between gross and net reveals the true cost of the fund manager.
What is Gross IRR?
Gross IRR is the internal rate of return calculated on the fund's underlying investments before management fees, carried interest, and fund expenses are subtracted. It reflects the GP's pure investment skill — how well they picked companies, negotiated terms, and timed exits. A fund with 35% gross IRR is generating excellent raw investment returns. GPs prefer to lead with gross IRR in marketing materials because it looks better. However, gross IRR tells LPs nothing about what they'll actually receive.
What is Net IRR?
Net IRR is the internal rate of return after all fees, carry, and expenses are deducted — it's the actual return LPs receive. Net IRR accounts for the 2% annual management fee, 20% carried interest on profits, fund formation costs, and operating expenses. A fund with 35% gross IRR might deliver only 22-25% net IRR after fees. Net IRR is the only metric that matters for LP decision-making, and it's what institutional LPs use to compare managers and allocate capital across asset classes.
Key Differences
| Feature | Gross IRR | Net IRR |
|---|---|---|
| Fees included | No fees deducted | All fees, carry, and expenses deducted |
| Who it matters to | GPs evaluating investment skill | LPs evaluating actual returns |
| Marketing use | Often highlighted in GP pitches (looks better) | Required for LP reporting (the real number) |
| Typical spread | 8-15 percentage points higher than net | The definitive return measure |
| Benchmark comparison | Compare against other GPs' gross | Compare against public market equivalent (PME) |
When Founders Choose Gross IRR
- →You're a GP evaluating your own investment performance in isolation
- →You want to compare raw stock-picking ability across different GPs
- →You're analyzing deal-level returns (individual company exits)
When Founders Choose Net IRR
- →You're an LP deciding which fund to invest in
- →You need to compare VC returns against public markets or other alternatives
- →You want to understand the true cost of a GP's fee structure
- →You're reporting performance to your own investment committee
Example Scenario
A GP pitches their Fund III with '40% gross IRR.' Impressive — but after the standard 2/20 fee structure plus fund expenses, LPs received 26% net IRR. Still excellent, but the 14-point spread shows the real cost of fees. Meanwhile, a competing GP with 30% gross IRR but a 1.5/15 fee structure delivers 24% net IRR — nearly the same LP outcome despite lower raw returns. This is why LPs always ask for net IRR.
Common Mistakes
- 1Comparing a fund's gross IRR against another fund's net IRR — always compare like with like
- 2Assuming gross and net IRR have a fixed relationship — fee drag varies enormously based on fund size, deployment pace, and carry structure
- 3Ignoring that subscription lines of credit inflate gross IRR more than net IRR
- 4Not asking GPs to provide net IRR when they only present gross figures (a red flag)
Which Matters More for Early-Stage Startups?
Net IRR is definitively more important for anyone deploying capital. Gross IRR is a useful diagnostic for GPs to evaluate their investment process. When evaluating fund managers, always demand net IRR and be skeptical of anyone who leads with gross figures.
Related Terms
Frequently Asked Questions
What is Gross IRR?
Gross IRR is the internal rate of return calculated on the fund's underlying investments before management fees, carried interest, and fund expenses are subtracted. It reflects the GP's pure investment skill — how well they picked companies, negotiated terms, and timed exits. A fund with 35% gross IRR is generating excellent raw investment returns. GPs prefer to lead with gross IRR in marketing materials because it looks better. However, gross IRR tells LPs nothing about what they'll actually receive.
What is Net IRR?
Net IRR is the internal rate of return after all fees, carry, and expenses are deducted — it's the actual return LPs receive. Net IRR accounts for the 2% annual management fee, 20% carried interest on profits, fund formation costs, and operating expenses. A fund with 35% gross IRR might deliver only 22-25% net IRR after fees. Net IRR is the only metric that matters for LP decision-making, and it's what institutional LPs use to compare managers and allocate capital across asset classes.
Which matters more: Gross IRR or Net IRR?
Net IRR is definitively more important for anyone deploying capital. Gross IRR is a useful diagnostic for GPs to evaluate their investment process. When evaluating fund managers, always demand net IRR and be skeptical of anyone who leads with gross figures.
When would you encounter Gross IRR vs Net IRR?
A GP pitches their Fund III with '40% gross IRR.' Impressive — but after the standard 2/20 fee structure plus fund expenses, LPs received 26% net IRR. Still excellent, but the 14-point spread shows the real cost of fees. Meanwhile, a competing GP with 30% gross IRR but a 1.5/15 fee structure delivers 24% net IRR — nearly the same LP outcome despite lower raw returns. This is why LPs always ask for net IRR.
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