What is gross IRR?
Gross IRR is the internal rate of return on a fund's investments measured before the deduction of management fees, carried interest, and fund-level expenses. It captures how the underlying deals performed — the manager's investing skill — stripped of the cost of running the fund.
It is the cleaner read on the GP's actual investment ability, because it isolates the deals from the fee structure layered on top. But it is not a number any limited partner can earn. By the time fees and carry come out, the LP receives the net figure, which is always lower. Gross IRR answers "how good were the investments?"; net IRR answers "what did I make?"
Because the gap between gross and net is precisely the cost of the fund, the spread between the two is itself informative — a wide spread signals a high fee load or a large carry take relative to the return generated.
How gross IRR is built and where it can mislead
Gross IRR is computed from the same cash-flow logic as any IRR, but on the pre-fee, deal-level flows.
- Use investment-level cash flows. Capital deployed into deals out, proceeds from deals in, valued at their dates.
- Exclude fund-level costs. No management fee, no carried interest, no fund operating expenses enter the calculation.
- Solve for the rate. The annualized rate that zeroes the net present value of those deal-level flows is the gross IRR.
The trap is comparability. Gross IRR is sometimes quoted on a deal-only basis that ignores the cash drag of holding committed-but-undeployed capital, and definitions of which expenses count vary between managers. A gross IRR is only meaningful once you know exactly what was excluded from it.