What is net IRR?
Net IRR is the internal rate of return a limited partner actually realizes after all fund costs — management fees, carried interest, and fund-level expenses — have been deducted. It is computed from the cash flows the LP genuinely experiences: capital wired in, distributions received back, net of everything the GP takes.
This is the figure that matters to an investor, because it is the only one they can spend. Gross IRR describes how the underlying deals performed; net IRR describes what survived the fee structure to reach the LP. Whenever a return is quoted without qualification in an LP context, net IRR is usually what is meant — and a careful LP confirms it.
The spread between gross and net IRR is the all-in cost of the fund expressed in return terms. A manager with strong gross performance but a heavy fee load can deliver disappointing net IRR; conversely, disciplined fees can make a modest gross return into a respectable net one.
How net IRR is calculated
Net IRR uses the LP-experienced cash flows, not the deal-level flows.
- Take LP contributions as negatives. Every capital call the LP funds — including capital called to pay fees — is a negative flow on its date.
- Take LP distributions as positives. Every distribution net of carried interest is a positive flow on its date.
- Add residual NAV net of carry. The current value of unrealized holdings, reduced by the carry that would be owed if realized at that value, is the final positive flow.
- Solve for the rate. The annualized rate that zeroes the present value of those net flows is the net IRR.
Because residual NAV is reduced by accrued-but-unpaid carry, net IRR on a young fund depends on both the marks and an assumption about future carry — making early net IRR a partly estimated figure that firms up as the fund realizes.