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Gross IRR and net IRR measure the same fund and can differ by 500 to 800 basis points once fees and carry are deducted. Since February 2024, the SEC has required any marketing material that shows gross performance to show net performance with equal prominence, calculated over the same period and methodology (SEC Division of Investment Management FAQ, cited in ACA Global, October 2025). Confusing the two, or presenting one without the other, is no longer just a due-diligence red flag. It's a compliance issue.
The Core Difference
Gross IRR measures the return generated at the deal or portfolio level, before management fees, fund expenses, and carried interest are removed. Net IRR measures what's left after all three are deducted, which is the return that actually lands in a limited partner's capital account (ILPA Quarterly Reporting Standards).
- Gross IRR answers: how well did the general partner invest the capital deployed into deals?
- Net IRR answers: what did the limited partner actually earn on the capital committed to the fund?
Gross IRR will always be equal to or greater than net IRR. The two only converge in a fund with no management fee, no fund expenses, and no carried interest, a structure that does not exist in practice.
Why the Gap Exists
Three deductions separate gross performance from net performance:
- Management fees. Typically 1.5% to 2% annually, charged on committed or invested capital depending on the fund's terms.
- Carried interest. Usually 20% of profits above a preferred return hurdle, most commonly 8%, once the fund has returned invested capital to LPs.
- Fund expenses. Legal, administrative, and organizational costs charged directly to the fund rather than absorbed by the manager.
The spread is not fixed. It narrows for larger funds that negotiate lower fee rates and widens for smaller or newer managers, where fixed costs represent a larger share of the fund. It also compresses when a fund performs exceptionally well, since high absolute returns dilute the proportional drag of a flat management fee.
Why LPs Weight Net IRR More Heavily
Net IRR is the number that shows up in an LP's capital account statement, which is why it's the figure used for peer benchmarking. But allocators are trained to look past the headline number:
- Subscription line usage. A fund drawing on a credit facility before calling LP capital can show an inflated net IRR relative to a fund calling capital directly, since the return clock starts later. ILPA's Performance Template, released January 2025, now requires reporting net IRR both with and without subscription facility impact for this reason.
- Realized versus unrealized. Net IRR on an active fund still reflects interim marks. DPI, the cash actually distributed, is what allocators check when they want to know if a strong net IRR is real or still on paper.
- Vintage-year context. A given net IRR means something different depending on when the fund was raised, which is why allocators benchmark within vintage cohorts rather than against a blended average.
What This Means for Fund Managers
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Show both figures with equal prominence. The SEC FAQ makes this a compliance requirement, not a presentation choice.
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Disclose the fee and carry structure behind the spread. A wide gap invites questions; a wide gap with no explanation invites more.
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Flag subscription line impact explicitly. If a facility affects your net IRR calculation, present the unlevered figure before an LP asks for it.
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Benchmark net IRR against the right vintage and strategy, not a blended long-run average that flatters or unfairly penalizes your fund.
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Pair net IRR with DPI. A strong net IRR with weak DPI raises the question every allocator asks first: how much of this is cash back versus a mark.
A single net IRR figure, gross or net, means little without the peer set behind it. Joe holds net IRR, TVPI, and DPI on 18,000+ private funds, filterable by vintage year, strategy, fund size, and geography.
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