What Is Net IRR in Private Equity Fund Performance?

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Net IRR is the return a limited partner actually keeps after a fund's management fees, carried interest, and fund expenses are deducted. In 2025, top-quartile global buyout funds generated an 8% pooled IRR, less than half the 18% return of the S&P 500 (McKinsey Global Private Markets Report, February 2026). That gap is why allocators no longer take a headline return at face value: they ask whether it's gross or net, and increasingly, regulators are asking too.

Net IRR, Defined

According to the Institutional Limited Partners Association, net IRR is the dollar-weighted internal rate of return on an investment in a fund, net of management fees and carried interest, based on the timing of all cash flows and the fund's reported value at the measurement date (ILPA Quarterly Reporting Standards). In plain terms: it's the return that shows up in an LP's capital account, not the return the general partner generated on the underlying deals.

Gross IRR measures the opposite end of the same fund: performance at the deal or portfolio level, before fees, expenses, or carry are removed. Gross IRR will always be equal to or higher than net IRR. The only case where they match is a fund with no management fee, no carried interest, and no fund-level expenses, which in practice does not happen.

• Gross IRR: Return on the underlying investments before fees and carry. Used by GPs to evaluate deal-level skill.
• Net IRR: Return to the LP after fees, carry, and expenses. Used by LPs to evaluate actual fund performance.
• TVPI: Total value (distributed plus unrealized) divided by paid-in capital. A companion multiple to IRR for both GPs and LPs.
• DPI: Cash actually distributed divided by paid-in capital. Used by LPs to assess realized liquidity.

Why the Gross-to-Net Gap Exists

The distance between gross and net IRR comes from three deductions layered on top of the fund's underlying performance:

• Management fees: Typically 1.5% to 2% annually, charged on committed or invested capital depending on the fund's terms.
• Carried interest: Usually 20% of profits above a preferred return hurdle, most commonly 8%.
• Fund expenses: Legal, administrative, and organizational costs charged to the fund rather than the manager.

The size of the gap varies by fund size and structure. A $100 million fund charging 2% on committed capital carries a heavier proportional fee drag than a $1 billion fund charging the same rate, which is one reason net IRR compresses more sharply for smaller and newer managers.

What Current Benchmark Data Shows

McKinsey's Global Private Markets Report, published February 2026, breaks out pooled IRR performance by vintage year:

Source: McKinsey Global Private Markets Report, February 2026.

The same report found that specialist buyout funds outperformed generalist buyout funds on a pooled basis across 2010-2022 vintages, at 17% versus 13%, with lower loss ratios and less dependence on multiple expansion for their returns (McKinsey Global Private Markets Report, February 2026). For fund managers marketing a specialist strategy, that's a benchmark worth citing directly against a generalist competitor's numbers.

A single net IRR figure means little without the right peer group behind it. Joe, powered by Dakota, holds net IRR, TVPI, and DPI on 18,000+ private funds, filterable by vintage year, strategy, fund size, and geography.

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The Regulatory Backdrop Fund Managers Can't Ignore

Net IRR isn't just an LP due-diligence metric anymore. In February 2024, the SEC's Division of Investment Management issued a FAQ under the Marketing Rule clarifying that any advertisement showing gross performance must show net performance with equal prominence, calculated over the same period using the same methodology (ACA Global, October 2025). The FAQ specifically addressed a common industry practice: presenting gross IRR at the investment level and net IRR at the fund level, which produces different start dates once a subscription line of credit is involved.

The practical effect: a pitch deck or fundraising deck that leads with a strong gross IRR and buries or omits net IRR is now a compliance exposure, not just an optics problem.

How Allocators Actually Use Net IRR

Net IRR is the number that ends up in a capital account statement and the number LPs use for peer benchmarking, but it comes with limitations allocators are trained to check for:

• Subscription line effects. A fund that draws heavily on a credit facility before calling LP capital can show an inflated net IRR relative to a fund that calls capital directly, because the clock on the calculation starts later. ILPA's updated Performance Template, released in January 2025, now requires reporting net IRR both with and without the impact of subscription facilities specifically to close this gap.
• Interim marks versus realized value. Net IRR on an active fund reflects unrealized valuations. DPI, which measures cash actually returned, is the metric allocators increasingly weight against IRR when deciding whether a strong number is real or still on paper.
• Vintage-year comparisons only. A 15% net IRR means something different in a 2021 vintage than a 2015 vintage. Allocators benchmark within vintage-year cohorts, not across them.

What This Means for Fund Managers Raising Capital

1. Never lead a pitch with gross IRR alone. Present net IRR with equal prominence, per the SEC Marketing Rule FAQ, and be ready to explain the spread between the two.
2. Benchmark against the right vintage cohort, not against a blended long-run average that flatters or unfairly penalizes your fund.
3. Pair net IRR with DPI. A high net IRR with low DPI invites the question every allocator now asks first: how much of this is actually cash back.
4. Disclose subscription line usage. If a facility affects your net IRR calculation, show the unlevered figure alongside it before an LP asks for it.
5. Adopt the ILPA Performance Template early if you don't already report on it. Institutional LPs increasingly expect it, and it removes a common due-diligence friction point before it becomes one.

Net IRR only tells you something once it's benchmarked against the right vintage, strategy, and peer set, not a blended industry average. Joe lets you filter 18,000+ private funds by vintage year, strategy, fund size, and net IRR quartile to build that peer group yourself.

Request access to see how your fund's net IRR compares before an allocator asks.