What distinguishes gross IRR from net IRR in private equity?

The distinction between gross IRR and net IRR in private equity lies primarily in their accounting for management fees. Gross IRR is calculated based on the total returns generated by an investment before any fees and carried interest are deducted. In contrast, net IRR accounts for these expenses, providing a more accurate picture of the investor's actual return on investment after all fees have been paid.

Fundamentally, net IRR is often considered more relevant to investors because it reflects the true profitability of their capital considering the costs associated with managing the investment. This allows investors to assess how much they actually earn after all expenses, which is why it is crucial for evaluating the performance of a private equity fund from the investor's standpoint.

While it's true that gross IRR is typically higher than net IRR due to the absence of deductions for fees in its calculation, this is not the defining characteristic that sets them apart. Thus, while gross IRR may often be higher, that does not explain what distinguishes the two metrics in terms of their calculation and significance in investment analysis. As such, understanding that gross IRR represents returns before fees while net IRR reflects returns after fees is critical for interpreters of investment performance in this asset class.