Net Internal Rate of Return (Net IRR) is the annualized return earned by limited partners after accounting for management fees, carried interest, and fund expenses. It is the industry-standard metric for comparing private fund performance and is calculated using the actual timing and amounts of cash flows between the fund and its investors.
Mathematically, Net IRR is the discount rate that makes the net present value (NPV) of all cash flows (capital calls, distributions, and residual NAV) equal to zero. Because it accounts for the timing of cash flows, IRR can differ significantly from simple return on invested capital (MOIC or multiple) for the same fund.
A key consideration when interpreting IRR is that it is sensitive to the timing of cash flows. Early distributions boost IRR, which is why some managers optimize for IRR by returning capital quickly rather than maximizing total value. This creates a tension between IRR and multiple metrics that sophisticated investors navigate by evaluating both simultaneously.
Benchmark data from our fund performance database shows median Net IRR varies significantly by strategy and vintage year. Private equity buyout funds have historically delivered median Net IRRs in the 12-18% range, while venture capital shows higher dispersion with top quartile funds exceeding 25% but bottom quartile funds often negative. Credit strategies typically deliver 8-12% Net IRR with lower volatility.
When comparing IRRs across funds, several factors should be considered: vintage year (different market environments), strategy (different return profiles and risk levels), fund size (larger funds may have lower IRRs but more consistent performance), and the denominator effect (unrealized NAV vs. realized distributions). Our platform provides vintage-year adjusted benchmarks and peer group rankings to contextualize fund-level IRR data.
It is important to distinguish between Gross IRR and Net IRR. Gross IRR measures returns before fees and carried interest, while Net IRR reflects what investors actually receive. The spread between gross and net depends on fee structure, fund size, and performance. A typical 2/20 fee structure with a standard European waterfall might result in a 500-800 basis point difference between gross and net returns.