Net IRR is the annualized percentage return on your investment after all fees, management costs, and carried interest are deducted. Unlike Gross IRR, which ignores expenses, Net IRR shows your actual take-home return—the figure that should drive your investment decisions. For angel investors evaluating fund performance or portfolio returns, Net IRR is the only number that matters.
How It Works
When you invest through a fund or syndicate, multiple costs reduce your returns. Management fees (typically 2% annually) cover operations. Carried interest (usually 20%) is the fund manager's profit share on gains. There may also be transaction costs, legal fees, and operational expenses. Net IRR accounts for all these deductions and shows the compound annual growth rate remaining for investors like you.
The calculation works backward from your actual cash returned to you. If a fund shows 25% Gross IRR but charges 2% annual fees and 20% carry, the Net IRR might be 15-18%, depending on the fund's performance and fee structure.
Why It Matters for Investors
Comparing investments based on Gross IRR can be misleading. Two funds might claim similar gross returns, but different fee structures mean vastly different outcomes for your capital. A fund charging 3% management fees plus 30% carry will net you significantly less than one charging 1.5% and 20%, even with identical investment performance.
Net IRR is also the metric institutional investors use when evaluating fund managers. If you're considering co-investing alongside a fund or analyzing a manager's track record, you need Net IRR to make an apples-to-apples comparison. It prevents you from being dazzled by inflated gross numbers.
Example
Suppose you invest $100,000 in a startup fund. After 7 years, the fund distributes $300,000 back to you. The Gross IRR might be 20%, but the fund charged 2% annual management fees and 20% carry on profits. After these deductions, your Net IRR could be 14-16%. That 4-6 percentage point difference compounds significantly over time—potentially $50,000+ less over a decade-long portfolio.
Key Takeaways
- Net IRR is your actual return after all fees, carry, and expenses are paid—the real number for your wallet
- Always request Net IRR figures when evaluating funds; Gross IRR can hide the true cost of investing
- Compare investments using Net IRR to accurately assess which opportunities create the most value for you
- Lower fees don't guarantee better Net IRR, but they provide a meaningful advantage in early-stage investing where returns are uncertain