Gross IRR
Gross IRR is an internal rate of return calculated before specified fund-level fees, expenses and carried interest, using the cash flows and valuation methodology defined by the reporting convention.
Gross IRR separates investment performance from investor-level economics
IRR is a money-weighted return measure that is sensitive to when cash moves in and out.
Gross IRR applies that framework before specified fund-level fees and carried interest are deducted. ILPA’s glossary defines Gross IRR as IRR based on investment performance without taking management fees or carried interest into account.[1]
The word gross is therefore not a claim that every cost has disappeared. It identifies a reporting layer.
Methodology matters more than the label
Private funds do not all generate gross fund-level cash flows in exactly the same operational way.
ILPA’s current Performance Template provides methodologies designed to standardize how fund and portfolio performance metrics and associated contributions and distributions are reported.[2][3]
A reader evaluating Gross IRR should identify:
- which cash flows are included
- whether the calculation is at investment or fund level
- how fund expenses are treated
- how subscription facilities are handled
- what ending NAV is used
- the measurement date
Two numbers both labeled Gross IRR can be less comparable than they first appear if the underlying conventions differ.
Gross IRR can exceed Net IRR by a wide margin
Suppose a portfolio of investments performs well before fund economics.
The gross calculation may reflect investment cash flows and residual value before management fees and carried interest. The LP-level result must also absorb those economics and other applicable costs.
The difference between gross and net performance can therefore reveal the cumulative effect of fees, expenses, carry and cash-flow structure.
It should not automatically be interpreted as evidence of excessive fees. Strategy, fund duration, performance level and the timing of expenses all matter.
Timing can move IRR without changing total value
Because IRR is sensitive to timing, returning the same amount of money earlier can increase IRR.
That characteristic is especially important when funds use subscription lines. Borrowing can postpone capital calls to LPs while investments are already held by the fund.
If the reported methodology uses the later LP contribution date, the shorter measured time between contribution and distribution can increase reported IRR even though the underlying investment did not become more valuable solely because the call was delayed.
Current ILPA performance reporting explicitly addresses calculations with and without the impact of fund-level subscription facilities.[2][3]
Gross IRR should be paired with a multiple
An IRR of 25% sounds stronger than 18%, but the comparison can be misleading if one investment lasted 18 months and the other lasted eight years.
MOIC or TVPI adds information about how much value was created relative to invested or paid-in capital.
A useful performance view normally combines:
- IRR for timing
- a multiple for magnitude
- DPI for realized cash
- NAV or RVPI for remaining value
Common mistakes
“Gross IRR is what LPs earned.”
No. LP economics are better represented by net measures after applicable fund-level fees and carry.
“Gross IRR is standardized everywhere.”
No. The calculation convention and cash-flow mapping should be checked.
“A higher Gross IRR always means more wealth was created.”
No. IRR and money multiples answer different questions.
“Subscription lines are irrelevant to Gross IRR.”
They can materially affect reported timing depending on the methodology.
Example
An investor evaluating Gross IRR should identify the stated calculation, valuation or governing-document convention before comparing the figure or structure across funds.
Professional note
Gross IRR is most useful for evaluating the performance of the underlying investment program before the LP economics of the vehicle are applied. Comparisons should use consistent methodologies, vintage context and accompanying multiples rather than ranking funds on one percentage alone.
Related terms
- Management Fee
A private-fund management fee is a recurring contractual fee paid to the investment adviser, manager or affiliated entity for managing the fund, commonly calculated from a defined fee base.
- Carried Interest
Carried interest is a contractual allocation of private-fund profits to the general partner, sponsor or affiliated carry vehicle, usually after specified return-of-capital and performance conditions are satisfied.
- Paid-In Capital
Paid-in capital is the amount of an investor’s committed capital that has actually been transferred to a private fund through capital calls.
- Internal Rate of Return (IRR)
Internal rate of return (IRR) is the discount rate that makes the net present value of an investment’s cash inflows and outflows equal zero.
- Public Market Equivalent (PME)
Public Market Equivalent (PME) is a family of methods that compares private-investment performance with a public-market benchmark while incorporating the timing of private cash flows.
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