Gross IRR and net IRR

Gross IRR and net IRR explanation. As we know Gross IRR is calculated net of fees. Net IRR is net of mgmt fees, carried interest and other comp to the GP. Remember that net means after the fee is removed, and gross means before the fee is deducted. Why we show IRR? Firstable, when the client controls the cash flows to provide him with his company’s return. The return shows the manager’s performance and the impact of the company’s cash flow decisions. Why to show net? This reflects how company is doing, after:

– the impact of the manager’s decisions,
– the impact of the advisory fee,
– the impact of their cash flow decisions.

The second possibility could be if the manager is in control of the cash flow. Net can reflect whole impact and that’s why this should be a way better return. However mind that, if the manager provides company’s performance to prospects then both net and gross and net can be suitable. This is only mine opinion, many economists would find the idea that a gross return represents the manager’s skill wrong. It’s due to the fact that when we evaluate the manager, then we’re evaluating the firm as well (in terms of its operating efficiency and its manager selection). Also some people think, quite rightly, that gross return is impossible because anyone can keep all his gross returns.

When considering gross IRR and net IRR and wanting to evaluate a few investment managers, GIPS being the goal, then you have to provide net returns. In other cases, mutual funds for instance can’t be evaluated properly, because mutual funds are known to require posting net returns.

The final question in case of gross IRR and net IRR would be: what kind of return shows me how my wealth has changed? Well, to answer this properly, you definitely need a NET IRR.

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