Module IV· IRR / MOICAdvanced
Question
What is the difference between 'gross IRR' and 'net IRR'?
Answer
What
Two views of the fund return:
- Gross IRR: IRR before management fees and carried interest. The GP view — the sponsor's result from the deals themselves.
- Net IRR: IRR after management fees and carried interest. The LP view — what the investor actually earns.
Typical spread
4–8 percentage points. On a 25% gross IRR, the LP ends up at ~20% net IRR after a 2% p.a. management fee, 20% carry over an 8% hurdle, and setup costs.
Deep diveShow more details
Example — typical middle-market PE fund
| Item | Value |
|---|---|
| Gross IRR (before fees) | 25% |
| − Management fee 2% p.a. | −2.0 ppt |
| − Carry 20% over 8% hurdle | −2.5 ppt |
| − Setup costs / fund expenses | −0.5 ppt |
| = Net IRR (LP) | 20% |
Spread by fund size
| Fund size | Mgmt fee | Carry | Hurdle | Spread gross → net |
|---|---|---|---|---|
| Small (<$500M) | 2% | 20% | 8% | 7–9 ppt |
| Mid ($500M–$2B) | 1.75% | 20% | 8% | 6–8 ppt |
| Large (>$2B) | 1.5% | 20% | 8% | 5–7 ppt |
Common pitfalls
- A pitch shows only gross IRR: the LP immediately asks for net.
- Whole-fund vs deal-by-deal carry calculation makes a 1–2 percentage point difference.
Pitch tip
Question: "What do you communicate to LPs?"
Answer: "Net IRR — that's what the LP actually earns. Show the gross-to-net bridge in detail, transparent about fees and carry. Sponsors who show only gross lose credibility in the fundraise"